part,  ^>c!)affnet 

Economic 


THE  CAUSE  AND  EXTENT  OF  THE  RECENT  INDUS- 
TRIAL PROGRESS  OF  GERMANY.  By  Earl  D.  Howard. 

THE  CAUSES  OF  THE  PANIC  OF  1893.  By  William  J. 
Lauck. 

INDUSTRIAL  EDUCATION.  By  Harlovr  Stafford  Person, 
Ph.D. 

FEDERAL  REGULATION  OF  RAILWAY  RATES.  By  Al- 
bert N.  Merritt,  Ph.D. 

SHIP  SUBSIDIES.  An  Economic  Study  of  the  Policy  of  Sub- 
sidizing Merchant  Marines.  By  Walter  T.  Dunmore. 

SOCIALISM  :  A  CRITICAL  ANALYSIS.     By  O.  D.  Skelton. 

INDUSTRIAL  ACCIDENTS  ANDTHEIR  COMPENSATION. 
By  Gilbert  L.  Campbell,  B.  S. 

THE  STANDARD  OF  LIVING  AMONG  THE  INDUSTRIAL 
PEOPLE  OF  AMERICA.  By  Frank  H.  Streightoff. 

THE    NAVIGABLE   RHINE.     By  Edwin  J.  Clapp. 

HISTORY  AND  ORGANIZATION  OF  CRIMINAL  STATIS- 
TICS IN  THE  UNITED  STATES.  By  Louis  Newton 
Robinson. 

SOCIAL  VALUE.     By  B.  M.  Anderson,  Jr. 

FREIGHT  CLASSIFICATION.     By  J.  F.  Strombeck. 

WATERWAYS  VERSUS  RAILWAYS.  By  Harold  Glenn 
Moulton. 

THE  VALUE  OF  ORGANIZED  SPECULATION.  By  Harri- 
son H.  Brace. 

HOUGHTON  MIFFLIN  COMPANY 

BOSTON  AND  NEW  YORK 


& 


XIV 

THE  VALUE  OF  ORGANIZED 
SPECULATION 


THE  VALUE  OF 
ORGANIZED  SPECULATION 


BY 

HARRISON  H.  BRACE 

Author  of  "  Gold  Production  and  Future  Prices" 


BOSTON  AND  NEW  YORK 
HOUGHTON  MIFFLIN  COMPANY 

re$$  Cambribge 
1913 


, 


COPYRIGHT,  1913,  BY  HART,  SCHAFFNER  &   MARX 
ALL  RIGHTS  RESERVED 

Published  April  /0/j 


PREFACE 

THIS  series  of  books  owes  its  existence  to  the  generosity  of 
Messrs.  Hart,  Schaffner  &  Marx,  of  Chicago,  who  have 
shown  a  special  interest  in  trying  to  draw  the  attention  of 
American  youth  to  the  study  of  economic  and  commercial 
subjects.  For  this  purpose  they  have  delegated  to  the 
undersigned  committee  the  task  of  selecting  or  approving 
of  topics,  making  announcements,  and  awarding  prizes 
annually  for  those  who  wish  to  compete. 

For  the  year  ending  June  1,  1911,  there  were  offered:  — 

In  Class  A,   which   included  any  American  without 

"restriction,  a  first  prize  of  $1000,  and  a  second  prize  of  $500. 

In  Class  B,  which  included  any  who  were  at  the  time 

undergraduates  of  an  American  college,  a  first  prize  of  $300, 

and  a  second  prize  of  $200. 

Any  essay  submitted  in  Class  B,  if  deemed  of  sufficient 
merit,  could  receive  a  prize  in  Class  A. 

The  present  volume,  submitted  in  Class  A,  was  awarded 
the  second  prize  in  that  class. 

J.  LAURENCE  LAUGHLTN,  Chairman, 
University  of  Chicago. 
J.  B.  CLARK, 

Columbia  University. 
HENRY  C.  ADAMS, 

University  of  Michigan. 
HORACE  WHITE, 

New  York  City. 
EDWIN  F.  GAY, 

Harvard  University. 


A 


AUTHOR'S  PREFACE 

IN  this  short  monograph  the  attempt  is  made  to  consider  in 
a  spirit  of  fairness  the  much  controverted  question  of  the 
value  of  organized  speculation.  The  undertaking  is  a  dif- 
ficult one  from  the  fact  that  the  exchanges  themselves  are 
in  a  formative  stage,  as  is  also  public  opinion  concerning 
them;  and  the  positions  taken  by  the  respective  disputants 
are  far  apart. 

The  question  of  prices  is  an  abstruse  one ;  and,  in  the 
subject  under  discussion,  we  must  attempt  to  discriminate 
between  the  price-making  factors  which  are  general  in  their 
effects  and  those  which  are  peculiar  to  the  exchanges.  Yet 
the  elements  which  determine  prices  blend  into  one  another 
almost  indistinguishably.  As  regards  the  general  effects  of 
organized  speculation  upon  business,  the  matter  is  beset 
with  further  complications;  and  it  is  almost  impossible  to 
express  one's  self  with  accuracy  about  the  various  phases 
which  the  facts  assume,  without  appearing  to  make  con- 
tradictory statements. 

Upon  a  commercial  exchange  the  weaknesses  of  human 
nature  are  exhibited  at  every  point.  The  hopes  and  fears  of 
the  persons  involved,  the  peculiar  nature  of  an  organization 
which  leaves  individuality  untrammeled,  but  at  the  same 
time  gives  opportunity  for  the  display  of  the  mysterious 
psychology  of  a  crowd,  as  well  as  the  temptations  of  the 
gambling  spirit,  are  among  the  factors  to  be  considered. 
All  these  and  other  determinants  act  and  react  upon  one 
another  in  great  complexity.  It  is  impossible  to  reduce  the 
discussion  to  a  few  simple  formulas  and  rules,  or  even  from 
an  extensive  consideration  of  statistics  to  formulate  a 
machine-made  plan  for  accurately  describing  the  head, 
the  brain,  —  the  nervous  system  of  our  modern  commerce. 


viii  AUTHOR'S  PREFACE 

The  writer  therefore  asks  the  indulgence  of  his  readers  if 
he  be  obliged  in  some  cases  to  point  out  that  causes  and 
effects  are  so  intermixed  that  definite  conclusions  cannot 
be  reached  in  regard  to  particular  departments  of  the  sub- 
ject, or  if  he  fail  to  reduce  his  discussion  of  ever  varying 
human  moods  and  passions  to  the  regularity  of  a  mathe- 
matical diagram. 

Organized  speculation  is  important  in  the  present.  It 
will  become  of  much  greater  importance  in  the  future.  As 
hinted  in  the  text,  it  contains  within  itself  suggestions  for 
the  solution  of  social  problems  which  are  the  present-day 
puzzle  of  statesmen  and  philanthropists.  It  is  worthy  of  the 
study  of  specialists  in  economics,  in  ethics,  and  in  psycho- 
logy; and  it  is  of  such  practical  importance  that  it  should 
receive  attention  and  consideration  from  all  classes  of  the 
people.  In  order  to  help,  even  if  it  be  but  little,  in  awaken- 
ing a  wide  interest  in  the  discussion  of  the  subject,  the 
writer  has  attempted  wherever  possible  to  use  the  popular 
style. 

HARRISON  H.  BRACE. 

CHICAGO,  December,  1912. 


CONTENTS 


INTRODUCTION 

The  Chance  Element 4 

Guarding  against  Risk 5 

The  Place  of  the  Speculator 5 

The  System  adopted 7 

Evolution  and  History 8 


CHAPTER  I 

FEATURES  OF  ORGANIZED  SPECULATION 15 

The  Commercial  Exchange 15 

The  Method  of  doing  Business 19 

The  Orders 21 

Distributing  Quotations  and  News 25 

Describing  the  Market 29 

Margin  Trading      .  31 

Future  Delivery 32 

Short  Selling 34 

Borrowing 36 

Substitution 37 

Cancellation  of  Trades 39 

Ringing  Out 40 

Book  Accounts 43 

The  Clearing-House 44 

A  Distinguishing  Feature 45 

Speculators  classified 46 

CHAPTER  H 

THE  EFFECT  UPON  PRICES 50 

The  Minor  Fluctuations 51 

Extreme  Fluctuations          54 

A  Market  with  Two  Sides 59 

The  Excitability  of  Speculators 64 

A  Summary 65 

Depressing  Prices          65 

The  Demand  and  Supply 67 

The  Temper  of  the  Speculators 71 


CONTENTS 

Corners 78 

The  Commodity  in  Store 80 

The  Street  Supply  of  Stocks 85 

Different  Nations  and  Classes          87 

Cotton  Exchanges 89 

Summary  of  the  Upward  Tendencies     . 92 

The  Complication  of  Prices  —  A  General  View 94 

Summary  of  the  Three  Price  Tendencies 96 


CHAPTER  m 

PRICES  (continued)  SOME  FALLACIES  CONSIDERED  ...  97 

The  Underlying  Fallacy 100 

Selling  Four  Times                     » 102 

The  Offers  to  sell 104 

Philanthropy 105 

The  Payment  of  Differences 107 

The  Interest  of  the  Parties 108 

The  Strength  of  the  Parties 112 

Different  Seasons 115 

Statistical  Fallacies 120 

The  Question  of  Commissions          121 

Clearing-House  Transactions 123 

Hedging  misunderstood 125 

Restricting  Trade          126 

Commerce  is  Natural 127 

The  Legitimacy  of  Fluctuations 128 

Summary  of  the  Last  Two  Chapters 138 

CHAPTER  IV 

INDIRECT  EFFECTS 141 

A  Continuous  Market 141 

Panics 144 

Amateurism  again 145 

Hedging 151 

The  World  Market 159 

The  Directive  Function 162 

The  Directive  Influence  of  the  Securities  Market     ....  163 

General  Business  Predictions 165 

Some  Exceptions  considered 167 

A  Reduction  in  Costs 169 

The  Husbanding  of  Resources 176 

Publicity 177 

Summary  of  the  Chapter    ..........  178 


CONTENTS  xi 

CHAPTER  V 

MORAL  AND  SOCIAL  VALUE 180 

The  Gambling  Spirit 180 

A  Charge  that  is  True 184 

Corporate  Dishonesty          186 

False  Rumors          189 

The  Crop  Killer 191 

Some  Discrepancies  and  Contradictions 193 

The  Test 197 

A  Summary 198 

A  Historical  Explanation 199 

CHAPTER  VI 

THE  ALTERNATIVE 203 

A  Natural  Development 203 

The  Problem 204 

A  Crippled  Market 205 

Monopoly 205 

A  Four-sided  Contest .  214 

A  Democratic  Institution 220 

A  Monopoly  of  Commissions 221 

Real  Gambling 222 

Unorganized  Speculation 225 

Speculative  Business 227 

Evasion 230 

Reforms  in  Method 233 

Exchanges  that  are  not  Exchanges 235 

Eliminating  Uncommercial  Practices 238 

Eliminating  Amateurism 242 

Summary  of  the  Chapter 250 


CONCLUSION 

SUMMING  UP  —  IMPORTANT  FACTS  TO  BE  EMPHASIZED  — 
THE  FAULTS  OF  ORGANIZED  SPECULATION  AS  IT  EXISTS 
To-DAY  —  ITS  VALUE  IN  ITS  IDEAL  FORM  ....  253 

The  Value  of  Organized  Speculation  as  shown  by  Present  Ten- 
dencies           257 

Postscript  —  Present  Legislative  Tendencies 262 


xii  CONTENTS 

APPENDIX 

TABLE  I.  Yearly  Range  of  Wheat  Prices  at  Chicago  ....    269 
TABLE  II.  Yearly  Range  of  Corn  Prices  at  Chicago          .      .      .270 

TABLE  III.  Yearly  Range  of  Cotton  Prices  at  New  York  (cents  per 
pound) 271 

TABLE  IV.  Mean  Monthy  Price  Contract  Wheat  (cash)  at  Chi- 
cago, 1901-1910  (cents  per  bushel) 272 

TABLE  V.  Mean  Monthly  Price  No.  2  Corn  (cash)  at  Chicago, 
1901-1910  (cents  per  bushel) 272 

TABLE  VI.  Average  Monthly  Price  Middling  Upland  Cotton  at 
New  York,  1900-1909  (cents  per  pound) 273 

TABLE  VII.  Mean  Monthly  Price  Contract  Wheat  (cash)  at 
Chicago  by  Years  ending  June  30  (cents  per  bushel)  .  .  .  273 

TABLE  VIII.  Visible  Supply  of  Wheat  in  Millions  of  Bushels  by 
Years  ending  June  30 274 

TABLE  IX.  Mean  Monthly  Price  No.  2  Corn  (cash)  by  Years 
ending  June  30  (cents  per  bushel) 274 

TABLE  X.  Visible  Supply  of  Corn  in  Millions  of  Bushels  by  Years 
ending  June  30 275 

TABLE  XI.  Average  Monthly  Price  Middling  Uplands  Cotton  in 
New  York  by  Years  ending  August  31  (cents  per  pound)  .  .  275 

TABLE  XII.  Visible  Supply  of  American  Cotton  in  Millions  of  Bales 
by  Years  ending  August  31 276 

TABLE  XIII.  Relative  Prices  of  Stocks  compared  with  Relative 
Railway  Dividends  and  Net  Income  by  Years  ending  June  30, 
1891-1909,  Arithmetic  Means  .  276 


LIST  OF  DIAGRAMS 

I.  Yearly  Range  of  Wheat  Prices  at  Chicago  1865-1910  .      .      56 
II.  Yearly  Range  of  Corn  Prices  at  Chicago  1865-1910      .      .      56 

III.  Yearly  Range  of  Cotton  Prices  at  New  York  1830-1909     .      57 

IV.  Prices  of  Wheat  and  Corn  1901-1910  and  of  Cotton  1900- 

1909  averaged  by  Months .117 

V.  Average  Prices  of  Wheat  and  Average  Visible  Supply  (re- 
versed) years  ending  June  30 .133 

VI.  Average  Prices  of  Corn  and  Average  Visible  Supply  (re- 
versed) years  ending  June  30 134 

VII.  Average  Prices  of  Cotton  and  Average  Visible  Supply  (re- 
versed) years  ending  August  31 135 

VIII.   Relative  Railway  Dividends,  Net  Income  and  Prices  of  Stocks 

years  ending  June  30 137 


THE  VALUE  OF  ORGANIZED 
SPECULATION 


THE  VALUE  OF  ORGANIZED 
SPECULATION 

INTRODUCTION 

THE  subject  of  this  essay  will  appear  to  most  minds  a 
strange  one.  "What  can  be  gained,"  the  extremist  will 
ask,  "from  a  discussion  of  the  value  of  organized  specula- 
tion, when  it  is  perfectly  obvious  that  it  has  no  value  and 
only  leads  to  human  misery?  Surely,  it  needs  no  argument 
to  prove  that  suicide  should  not  be  encouraged  or  that 
defalcations  in  positions  of  trust  are  not  desirable." 
"What,"  exclaims  the  ardent  sentimentalist,  "can  be 
more  plain  than  that  it  is  all  pure  gambling?  And  why  not 
sweep  the  whole  accursed  thing  away,  instead  of  discussing 
the  question  of  its  possible  usefulness?" 

But  organized  speculation,  though  it  be  the  common 
scapegoat,  still  survives:  and  though  Germany,  for  in- 
stance, has  made  drastic  attempts  to  change  the  methods 
by  which  certain  commodities  and  securities  are  dealt  in  on 
the  bourses,  yet  she  has  met  with  no  real  success.  In  the 
meantime  exchanges  prosper;  their  memberships  become 
more  and  more  valuable;  and  they  build  more  and  more 
costly  palaces  in  which  to  conduct  their  business.  May  it 
not  be  that  prejudice  is  the  cause  of  much  of  this  outcry? 
And  are  we  perfectly  certain  that  the  frequent  charges 
made  have  been  conclusively  proven?  Thus,  is  there  any 
proof  for  the  charge  that  transactions  upon  the  board  of 
trade  have  nothing  to  do  with  actual  commodities,  and 
that  no  deliveries  are  made  on  future  contracts?  Surely, 
some  of  the  statements  so  often  heard  are  unfounded;  and 
random  assertions  made  without  investigation  should  not 
be  accepted  as  truth. 


4  :         VAixJll  ^ORGANIZED  SPECULATION 


ii  the  business  of  speculation  were  not  the  subject  of  pre- 
judice, it  would  be  the  only  business  which  has  not,  at  one 
time  or  another,  been  under  suspicion.  War,  at  one  time, 
was  considered  as  the  only  proper  calling  for  a  gentleman; 
and  trade  was  thought  to  be  quite  degrading  in  its  effects. 
Even  greater  than  the  prejudice  against  merchants  was 
that  against  money  lenders,  tax  collectors,  or  bankers.  We 
find  the  actor  at  certain  periods  looked  down  upon.  Even 
the  profession  of  letters  has  been  considered  an  inferior  one; 
and  there  are  those  who  argue  that  one  of  the  reasons  which 
led  Sir  Walter  Scott  to  deny  he  wrote  the  Waverley  Novels, 
was  that  he  did  not  wish  to  be  known  as  a  professional 
author. 

The  writer  of  this  holds  no  brief  for  the  board  of  trade  or 
the  stock  exchange.  He  merely  asks  the  reader  to  examine 
with  him  the  arguments  that  may  be  urged  in  regard  to  the 
value  of  organized  speculation,  considering  at  the  same  time 
those  disadvantages  which  serve  to  diminish  that  value,  or 
even,  in  some  respects,  to  overshadow  it. 

The  Chance  Element 

He  who  would  abolish  chance  from  human  affairs  will 
have  an  impossible  task.  The  truths  that  underlie  the 
world  may  be  imagined;  but  when  we  come  to  practical 
affairs,  we  find  that  there  is  an  element  of  risk  in  all  things. 
The  first  hunter  who  sought  to  entrap  game  found  that  his 
catch  at  different  times  was  unequal.  The  agriculturalist 
is  engaged  in  a  calling  in  which  there  is  certainly  a  great 
amount  of  risk.  Such  factors  as  drought,  moisture,  and 
other  elements  which  determine  whether  crops  shall  be 
good  or  bad  are  governed,  many  of  them,  by  the  purest 
chance.  In  undertaking  any  business  enterprise,  the  care- 
ful business  man  in  his  calculations  always  allows  for  the 
risk  which  he  well  knows  that  he  must  face. 


INTRODUCTION  5 

Guarding  against  Risk 

It  is  natural  that  the  world  should  seek  to  eliminate  this 
risk;  and  much  of  the  progress  in  the  sciences  and  practical 
arts  is  due  to  increasing  knowledge  of  the  comparative 
risks  of  different  courses  of  action.  By  studying  every 
factor  necessary  to  the  accomplishment  of  a  particular 
task,  the  head  of  an  industry  is  able  to  select  that  course 
which  will  be  least  fraught  with  danger. 

But  the  most  expedient  method,  even  after  it  has  been 
carefully  selected,  has  risks  associated  with  it  which  cannot 
be  eliminated  and  which  must  be  guarded  against  by  some 
form  of  insurance  or  a  system  that  is  analogous  to  insurance. 
There  are  such  perils  as  those  of  fire,  storm,  and  death 
which  are  guarded  against  directly  by  insurance,  the  method 
being  to  spread  them  over  a  greater  area.  Thus  risks  are 
so  distributed  that  losses  in  one  area  are  compensated  by  in- 
surance premiums  in  another.  The  different  forms  of  in- 
surance that  have  been  invented  are  remarkable  for  their 
number  and  variety;  nevertheless,  there  are  many  impor- 
tant risks  that  cannot  be  directly  provided  for  in  that  way, 
but  in  the  case  of  which  a  system  analogous  to  that  of  insur- 
ance must  be  used.  These  are  the  general  risks  of  business, 
which  are  infinite  in  the  variations  that  they  assume. 

The  Place  of  the  Speculator 

Some  of  these  general  risks,  which  cannot  be  borne  by 
insurance,  can  yet  be  undertaken  by  a  class  of  business 
men  who  specialize  as  speculators.  These  are  the  risks  of 
fluctuations  in  prices  due  to  changing  conditions  in  differ- 
ent periods  of  time,  and  the  handling  of  them  constitutes 
the  most  important  function  of  the  speculative  exchanges. 
In  the  case  of  the  prices  of  the  majority  of  commodities, 
these  speculative  risks  are  bound  up  with  general  business 
conditions  in  such  a  way  that  they  cannot  be  separated 
from  the  other  causes  of  expense  and  assumed  by  any  spe- 


6  VALUE  OF  ORGANIZED  SPECULATION 

cial  class.  But  by  speculation,  and  particularly  by  the 
machinery  of  organized  speculation,  many  of  these  risks 
can  be  thus  segregated  and  transferred. 

It  should  be  noted,  however,  that  while  the  function  of 
the  speculator  is  similar  in  many  respects  to  that  of  the 
insurer,  the  method  by  which  his  influence  is  applied  to  the 
world  of  commerce  is  quite  different.  It  is  not  through  a 
contract  whereby  he  agrees  to  indemnify  the  public  against 
loss  that  the  speculator  acts;  but  he  performs  his  function 
by  buying  and  selling  in  the  market.  When  he  believes  that 
prices  are  low,  he  purchases.  When  he  believes  that  prices 
are  high,  he  sells.  This  he  does  in  the  pursuit  of  his  own  self- 
ish interests;  but,  in  so  doing,  his  purchases  and  sales  have 
an  important  influence  upon  prices,  and  indirectly  upon  the 
whole  field  of  commerce. 

Thus  it  is  readily  seen  that  the  action  of  the  speculator 
affects  only  indirectly  the  demand  and  supply  of  actual 
commodities  and  securities.  What  he  buys  at  one  time  as 
a  speculator,  he  must  at  some  other  time  sell ;  for  the  imme- 
diate effects  of  his  speculations  are  neither  to  produce  com- 
modities nor  to  consume  them.  He  neither  adds  to  the  per- 
manent supply  nor  subtracts  from  it.  But  for  the  moment, 
at  the  time  of  a  purchase  or  sale,  he  exercises  an  important 
influence  upon  the  temporary  demand  and  supply,  with 
far-reaching  effect  upon  ultimate  production  and  consump- 
tion. Or,  to  look  at  the  question  in  a  slightly  different 
aspect,  he  distributes  the  demand  and  supply  over  different 
periods  of  time. 

To  sum  up  the  above  description  in  a  definition,  we  have 
the  following:  Speculation  is  the  forecasting  of  changes  in 
value,  and  buying  or  selling  in  order  to  take  advantage  of 
them.1  It  is  unnecessary,  however,  in  this  place  to  discuss 
the  question  to  what  class  of  producers  the  speculator 

1  Cf.  Report  of  Governor  Hughes' s  Committee  on  Speculation  in  Securities 
and  Commodities,  p.  3;  Emery,  Speculation  upon  the  Stock  and  Produce 
Exchanges  of  the  United  States,  p.  96;  Chamberlain,  The  Principles  of  Bond 
Investment,  p.  8. 


INTRODUCTION  7 

belongs  —  whether,  for  instance,  his  services  are  a  part  of 
those  performed  by  the  capitalist  or  by  the  entrepreneur. 
That  there  is  risk  and  that  some  one  must  bear  it  seems 
obvious;  and  the  particular  risks  that  the  speculator  bears 
are  as  important  as  any. 

The  System  adopted 

It  is  quite  natural  that  the  organizing  tendency  of 
modern  commerce  should  be  availed  of  by  speculators  as 
well  as  others;  and  the  form  which  speculation  takes  when 
organized  is  that  of  operations  upon  an  exchange.  It  should 
be  noted,  however,  at  this  point  that  there  are  different 
kinds  of  organization.  There  is  the  form  which  aims  to 
crush  out  individual  initiative  wherever  possible;  and  there 
are  other  forms  in  which  the  uniting  force  is  applied  hi  such 
a  way  that,  while  there  is  constraint  at  certain  points,  yet 
in  most  respects  freedom  of  action  and  individual  initiative 
are  greatly  increased. 

An  exchange  organization  is  of  this  latter  class,  for  its 
tendency  is  to  promote  commercial  freedom  rather  than  to 
smother  it.  A  clique  or  pool  may  exist  upon  an  exchange  in 
the  same  way  that  one  may  exist  in  outside  commerce.  But 
the  exchange  organization  is  entered  into  for  the  purpose  of 
promoting,  not  of  stifling,  competition;  and  its  machinery  is 
so  arranged  as  to  give  the  opposing  price-making  factors 
the  freest  play. 

It  would,  therefore,  be  quite  fallacious  to  compare  the 
organization  of  a  commercial  exchange  to  that  of  an  army, 
whose  constituent  units  are  drilled  to  act  in  unison  against 
a  common  enemy  for  the  accomplishment  of  a  particular 
purpose.  A  better  use  of  the  simile  will  be  found  in  com- 
paring the  exchange  to  an  organization  formed  for  the  pur- 
pose of  conducting  gladiatorial  combats,  in  which  the  rules 
are  so  carefully  framed  that  any  one  can  have  a  chance  to 
demonstrate  any  superiority  he  may  have,  and  where  only 
the  fit  survive. 


8  VALUE  OF  ORGANIZED  SPECULATION 

A  definition  might  then  be  framed  as  follows:  Organized 
speculation  is  a  system  of  bringing  together  speculators  and 
other  traders  with  a  view  to  facilitating  the  freest  trading 
among  them,  so  that  many  of  the  risks  of  commerce  may  be 
segregated  and  borne  by  a  class  who  specialize  in  the  under- 
taking. The  effect  of  this  system,  and  particularly  its  value 
to  the  community,  will  form  the  subject  of  this  essay. 

Evolution  and  History 

Little  light  can  be  thrown  upon  the  subject  by  merely 
using  our  imagination  as  a  basis  for  reasoning  hi  regard  to 
what  must  have  been  the  place  of  speculation  hi  past  ages. 
It  doubtless  originated  in  the  earliest  forms  of  trading. 
Even  among  people  in  a  low  state  of  commercial  develop- 
ment, it  would  be  natural  for  those  with  a  little  more  apti- 
tude for  commerce  than  the  rest  to  take  advantage  of  fluc- 
tuations in  values,  as  did  Joseph  in  Egypt.  Little,  however, 
can  be  learned  from  a  study  of  the  rudimentary  forms  of 
exchanges,  since  the  types  which  developed  later  are  quite 
different  in  character. 

More  significant  for  our  purposes  is  the  appearance  of 
exchanges  such  as  the  Royal  Exchange  in  London.  This 
exchange  was  built  through  the  generosity  and  public 
spirit  of  Sir  Thomas  Gresham,  and  was  formally  opened  by 
Queen  Elizabeth  in  1571.  The  plan  of  the  building  was 
suggested  by  a  bourse  which  had  recently  been  erected  at 
Antwerp,  and  exchanges  of  a  similar  character  made  their 
appearance  in  many  commercial  centres.  The  feature  which 
differentiates  this  form  of  exchange  from  previous  types  is 
the  fact  that  it  involves  the  conscious  application  of  the 
exchange  idea  in  the  erection  of  a  building  or  the  formal 
designation  of  a  locality  for  the  trading. 

This  comparatively  early  type  of  the  modern  exchange 
had  a  wide  scope  in  the  character  of  its  dealings,  for  mer- 
chants in  a  number  of  different  commodities  and  securities, 
as  well  as  shipowners,  underwriters,  and  others,  were  all 


INTRODUCTION  9 

accommodated  within  its  walls.  There  was  speculation  in 
the  exchanges  and  market-places  La  the  early  days  hi  the 
same  way  that  there  was  speculation  outside  of  them;  but, 
in  the  types  of  exchanges  just  discussed,  there  was  no 
special  organization  of  speculation,  nor  was  there  that  pro- 
vision for  specialization  hi  different  departments  which  is 
the  characteristic  of  modern  development.  Hence  we  find 
dealers  in  different  kinds  of  commodities  and  securities 
leaving  the  Royal  Exchange  and  establishing  exchanges  of 
their  own.  So  thorough  has  been  the  hegira  that,  at  the 
present  time,  the  Royal  Exchange  has  a  deserted  appear- 
ance, and  is  used  for  only  one  important  kind  of  financial 
operations,  —  the  dealing  hi  foreign  bills. 

When  the  different  interests  represented  upon  the  Royal 
Exchange  were  separating,  each  provided  hi  its  new  organ- 
ization for  the  particular  necessities  and  conveniences 
which  it  needed;  and,  to  accommodate  certain  classes  of 
trade,  the  latest  type  of  exchange  made  its  appearance, 
namely,  the  modern  speculative  exchange  or  the  one  in 
which  speculation  largely  predominates.  Although  the 
other  lands  of  market-places  and  exchanges  exist  in  abund- 
ance at  the  present  day,  it  is  this  latest  development,  the 
large,  wealthy,  important  speculative  exchange,  which  is 
ever  in  the  public  eye  and  is  intimately  associated  with 
organized  speculation. 

It  was  with  the  development  of  the  commercial  corpora- 
tion hi  its  modern  form  and  with  the  funding  of  national 
debts  that  the  appearance  of  stock-brokers  was  first  noted. 
In  London  they  first  met  at  the  Royal  Exchange  with 
other  business  men  as  just  described.  They  were  assigned 
to  a  particular  part  of  the  building,  and  even  in  those  early 
days  of  the  seventeenth  century,  there  were  doubts  as  to 
the  legitimacy  of  the  business;  yet  those  who  dealt  in  stocks 
were  so  numerous  that  they  could  not  all  be  accommo- 
dated in  the  place  assigned  to  them  and  they  crowded  the 
others.  Finding  themselves  unwelcome,  the  stock-brokers 


10         VALUE  OF  ORGANIZED  SPECULATION 

were  among  the  first  to  withdraw  and  did  business  at  differ- 
ent times  in  Change  Alley,  at  coffee-houses,  and  at  the 
Bank  of  England. 

The  first  distinctive  organization  took  the  form  of  a  club 
among  brokers  who  frequented  a  certain  coffee-house,  but 
the  present  organization  of  the  London  Stock  Exchange 
may  be  said  to  date  from  1773,  in  which  year  the  exchange 
occupied  a  building  of  its  own  and  adopted  many  of  the 
features  which  now  characterize  it. 

In  New  York  a  little  later  than  at  London  the  ad- 
vantages of  organization  became  apparent.  The  favorite 
meeting-place  for  stock-brokers  in  the  early  days  was  near 
a  buttonwood  tree  which  stood  in  front  of  68  Wall  Street; 
and  in  1792  the  brokers  entered  into  an  agreement  in  regard 
to  the  rates  of  commissions  to  be  charged  on  stock  transac- 
tions. It  was  not,  however,  till  1817  that  a  comprehensive 
organization  of  the  New  York  Stock  Exchange  was  effected. 

In  every  other  country,  as  well  as  in  the  United  States 
and  England,  speculation  took  the  organized  form  as  soon 
as  the  stage  of  evolution  was  reached  at  which  trading  in 
stocks  and  securities  became  of  any  considerable  import- 
ance; and  the  history  of  the  stock  exchanges  is  the  history 
of  the  modern  financial  system.  In  their  early  days  they 
were  occupied  principally  with  the  large  increase  of  public 
debts  and  the  wars  that  made  them  necessary.  At  the  time 
of  the  Napoleonic  wars,  Nathan  Mayer  Rothschild  was  a 
prominent  member  of  the  London  Stock  Exchange.  The 
anecdote  is  often  told  of  how  he  witnessed  the  battle  of 
Waterloo,  and,  after  assuring  himself  that  the  Allies  were 
victorious,  secured  a  boatman  who  took  him  across  the 
English  Channel  with  such  expedition  that  he  arrived  in 
London  in  advance  of  all  others  from  the  scene  of  war,  and 
was  able  to  avail  himself  of  his  knowledge  of  the  issue  of  the 
battle  in  making  advantageous  trades  upon  the  stock 
exchange. 

In  this  country  the  Civil  War,  with  its  far-reaching 


INTRODUCTION  11 

effects  upon  commerce  and  finance,  was  an  important  event 
in  the  history  of  the  exchanges.  The  period  of  the  war  was 
a  time  of  great  expansion  of  organized  speculation;  and  the 
speculative  spirit  engendered  then  has  continued  to  the 
present  day  and  is  among  the  factors  which  have  made  this 
country  the  one  in  which  speculation  in  stocks  most  widely 
prevails.1 

The  great  work  of  Wall  Street,  however,  has  lain  in  the 
development  of  the  producing  power  of  the  country;  and  at 
every  stage,  the  speculative  markets  have  occupied  a  pro- 
minent place.  First  the  application  of  steam  power  to 
navigation  resulted  in  a  wonderful  development  of  com- 
merce and  the  formation  of  numerous  companies.  The 
completion  of  the  Erie  Canal  in  1825  further  accentuated 
this  development,  and  helped  to  increase  the  importance  of 
New  York  as  a  commercial  centre  and  a  speculative  market. 
The  great  growth  of  the  banking  business  about  the  time 
mentioned  and  the  trading  in  bank  stocks  which  ensued  was 
also  a  prominent  feature  of  speculative  dealings. 

When  the  building  of  railways  was  begun,  Wall  Street 
may  be  said  to  have  entered  into  its  most  important  work. 
Whether  the  activities  of  the  speculators  were  for  good  or 
ill,  the  history  of  organized  speculation  during  the  greater 
part  of  the  nineteenth  century  is  most  intimately  associated 
with  the  development  of  the  railway  system.  Later  the 
organization  of  industry  by  combining  widely  separated 
interests  has  to  some  extent  usurped  the  attention  which 
had  before  been  given  to  the  stocks  of  railways;  and  the 
wonderful  activity  of  Wall  Street  in  the  early  part  of  the 
twentieth  century  has  been  closely  associated  with  the 
trading  in  industrial  securities. 

In  European  stock  exchanges  the  financing  of  transporta- 
tion and  industrial  companies  has  not  been  so  prominent  at 
any  time  as  in  this  country.  Among  the  reasons  for  this 
difference  is  the  fact  that  machine  production  and  the  large 
1  Cf.  Bryce,  The  American  Commonwealth,  vol.  u,  chap.  CVH. 


12         VALUE  OF  ORGANIZED  SPECULATION 

corporations  necessary  to  it  are  not  so  important  as  in 
America.  Furthermore,  railway  lines  do  not  take  the  place 
of  ordinary  highways  to  the  extent  that  they  do  in  this 
country;  and  in  Europe  railways  are  more  frequently  built 
and  operated  by  governments.  Also,  the  supply  of  capital 
has  been  so  great  that  it  sought  an  outlet  in  other  lands,  so 
that  organized  speculation  hi  Europe  has  concerned  itself 
more  especially  with  securities  of  different  kinds  originat- 
ing in  countries  of  backward  development  in  out-of-the- 
way  parts  of  the  world,  and  the  fluctuations  in  commerce 
and  production  in  those  countries  have  been  quickly  re- 
flected in  the  European  stock  exchanges.  For  instance,  the 
Baring  panic  upon  the  London  Stock  Exchange  in  1890  had 
its  origin  in  unfortunate  financial  conditions  in  Argentina. 
The  European  exchanges,  moreover,  have  continued  to  pay 
great  attention  to  the  funded  debts  of  different  national- 
ities. And  the  issues  of  war  and  peace,  the  rivalries  of 
dynasties  and  the  alternations  in  military  and  naval  su- 
premacy of  the  different  nations  furnish  the  explanation 
for  most  of  the  important  events  in  their  history. 

There  appears  to  have  been  an  even  less  degree  of  realiza- 
tion of  the  possible  future  course  of  evolution  in  the  early 
commodity  exchanges  than  in  the  first  type  of  the  modern 
form  of  stock  exchange.  In  those  exchanges  the  develop- 
ment of  which  can  be  traced  to  early  times,  it  is  found  that 
the  idea  of  a  speculative  market  did  not  exist  at  first,  and 
that  the  facilities  for  organized  speculation  were  added  to 
other  methods  for  furthering  commerce  in  an  already 
existing  association.  Even  at  the  present  day  we  find  in 
some  cities  that  the  terms  "Board  of  Trade,"  "Chamber  of 
Commerce,"  and  "Produce  Exchange"  are  applied  to  asso- 
ciations which  have  no  speculative  market  and  which  exist 
only  for  developing  local  industries  and  commerce;  while 
in  other  cities  these  names  are  applied  to  associations  in 
which  the  speculative  element  overshadows  all  others. 

The  inconveniences  to  which  our  forefathers  were  sub- 


INTRODUCTION  13 

ject,  because  of  the  lack  of  organization  in  the  process  of 
fixing  the  prices  of  commodities,  can  scarcely  be  realized. 
At  present  any  man  may  enter  an  exchange  as  a  member 
or  through  a  broker  and  become  a  market  factor  to  the 
extent  of  the  amount  of  the  commodity  which  he  is  willing 
and  able  to  carry.  The  condition  that  prevailed  before  ex- 
changes assumed  their  present  prominence  offers  a  pitiful 
contrast,  when  it  is  remembered  that  formerly  the  small 
dealer  was  at  the  mercy  of  the  great  magnate  or  merchant, 
with  no  system  for  giving  dealers  of  his  class  any  voice  in 
determining  the  flow  of  commerce.  How  could  any  man 
know  what  price  to  place  upon  wheat,  for  example,  at  a 
time  when  famine  prevailed  in  one  province  and  a  surfeit  in 
an  adjoining  one,  and  when  there  were  no  systematic  ar- 
rangements for  utilizing  the  few  facilities  for  communica- 
tion and  transportation  that  were  at  hand?  Prices  in  the 
early  days  could  not  at  best  have  been  other  than  the  hap- 
hazard guesses  of  those  who  were  not  experts  and  who  had 
every  facility  for  taking  advantage  of  the  weaker  commer- 
cial units.  There  is  some  excuse,  then,  for  the  fiats  and 
decrees  of  governments  in  early  times  in  fixing  prices,  as  the 
facilities  were  lacking  for  scientifically  fixing  them  accord- 
ing to  true  commercial  standards. 

The  Chicago  Board  of  Trade,  which  is  the  most  im- 
portant exchange  for  trading  in  commodities,  was  incor- 
porated by  the  State  of  Illinois  in  1859;  but  the  present 
form  of  trading  had  not  developed  at  that  time.  Indeed,  it 
is  said  that  the  present  system  came  into  existence  as  an 
outgrowth  of  the  method  of  contracting  for  supplies  used 
by  the  Government  during  the  Civil  War.  For  instance,  a 
party  would  enter  into  a  contract  with  the  Government  to 
deliver  a  certain  quantity  of  pork;  and  this  contract  would 
afterwards  become  the  object  of  speculation.  But  whether 
the  contracts  of  the  Government  played  an  important  part 
or  not,  the  obvious  convenience  of  the  system  which  was 
finally  evolved  would  doubtless  have  caused  its  adoption 


14          VALUE  OF  ORGANIZED  SPECULATION 

sooner  or  later  in  any  case.  The  evolution  was  a  rapid  one, 
and,  by  the  year  1869,  a  statement  of  rules  for  the  system 
that  now  prevails  upon  the  Chicago  Board  of  Trade  made 
its  appearance.  By  1870  the  system  had  become  fully 
established,  not  only  in  regard  to  those  commodities 
traded  in  upon  the  Board,  but  in  respect  to  others  as  well. 

The  origin  of  the  New  York  Produce  Exchange  can  be 
traced  to  the  Dutch  occupation  hi  colonial  days.  But  the 
organizations  which  were  the  forerunners  of  the  present 
one  had  different  names  and  were  different  in  most  respects 
from  the  modern  exchange.  In  general  it  may  be  said  that 
the  commodity  exchanges  have  had  much  the  same  evolu- 
tion as  the  Chicago  Board  of  Trade,  except  such  of  them  as 
were  formed  after  the  present  type  had  been  developed. 
The  New  York  Cotton  Exchange,  for  instance,  was  not 
incorporated  till  1871,  and  the  New  York  Coffee  Exchange 
not  until  1885. 

The  commodity  exchanges  having  developed  and  as- 
sumed the  modern  form  later  than  the  stock  exchanges,  it 
is  found  that  organized  speculation  in  commodities  has 
played  a  comparatively  unimportant  part  in  the  history  of 
commerce.  This  speculation  is  intimately  connected  with 
the  development  of  the  modern  system  of  handling  com- 
modities which  became  necessary  as  a  complement  to  the 
introduction  of  transportation  by  rail  and  communication 
by  telegraph.  There  are  no  striking  events  in  this  gradual 
evolution,  however,  and  we  must  pass  at  once  to  a  discus- 
sion of  the  features  of  organized  speculation  as  it  exists  at 
present. 


CHAPTER  I 

FEATURES  OF   ORGANIZED   SPECULATION 

REFERRING  to  the  definition  given  in  the  Introduction,  it 
would  appear  that  the  activities  of  the  speculator  need  not 
be  essentially  different  from  those  of  any  other  business 
man,  and  that  the  contracts  he  enters  into  must  have  the 
same  general  characteristics  as  other  business  contracts. 
The  outward  appearances,  however,  and  the  forms  and 
methods  used  upon  the  exchanges  seem  so  strange  to  the 
novice  that  it  is  necessary  to  describe  them.  In  this  de- 
scription the  attempt  will  be  made  to  keep  ever  before  the 
reader  the  essential  identity  between  exchange  transac- 
tions and  those  made  upon  the  outside,  merely  pointing 
out  hi  each  case  the  appearances  which  make  them  seem  so 
different. 

The  Commercial  Exchange 

It  is  the  united  action  of  the  officers  and  members  of  the 
exchange  hi  establishing  and  enforcing  rules  and  regula- 
tions which  constitutes  the  organization  of  speculation. 
The  contracts  made  upon  the  exchanges  have  reference 
to  commodities  and  also  to  stocks,  bonds',  and  other  securi- 
ties. Most  exchanges  have  specialties.  One,  for  instance, 
may  organize  for  dealing  in  grain  and  provisions,  another  in 
stocks  and  bonds,  another  in  cotton,  and  so  forth. 

In  order  that  a  commodity  may  be  suitable  for  organized 
speculation,  it  must  be  capable  of  being  preserved  for  a 
reasonable  length  of  time,  and  of  being  graded  or  described 
with  sufficient  accuracy  so  that  it  can  be  referred  to  in 
speculative  contracts.  These  requirements  serve  to  illus- 
trate the  peculiar  nature  of  organized  speculation,  which  is 


16        VALUE  OF  ORGANIZED  SPECULATION 

principally  concerned  with  the  prices  of  a  given  kind  or 
quality  of  commodity  and  not  primarily  with  the  price  of  a 
specific  lot  or  package.  It  is  true,  there  may  be  speculation 
in  a  specific  article.  A  curio,  a  piece  of  real  estate,  or  a 
horse,  for  instance,  can  be  purchased  for  speculation;  but  it 
does  not  pay  to  organize  the  speculation  in  such  commodi- 
ties. The  specialization  involved  in  organized  speculation 
upon  the  commodity  exchanges  is  so  thoroughly  centred  in 
the  question  of  prices  of  the  different  groups  of  commodi- 
ties that  the  speculators  have  little  time  in  which  to  con- 
sider the  points  of  value  which  belong  distinctively  to  a 
particular  article,  or  to  concern  themselves  with  the  busi- 
ness details  of  preserving  rapidly  perishable  commodities. 

Furthermore,  it  is  necessary  to  have  in  store  a  consider- 
able quantity  of  the  commodity  speculated  in,  and  the  ware- 
house receipts  used  in  making  deliveries  upon  speculative 
contracts  must  call  for  commodities  of  a  certain  grade,  the 
quality  in  each  case  being  considered  uniform  throughout. 
The  grading  that  is  necessary,  in  order  that  a  commodity 
can  be  speculated  in,  is  often  a  matter  of  much  difficulty; 
and,  as  will  presently  be  shown,  various  expedients  are 
adopted  in  order  that  the  amount  of  commodities  in  store 
may  be  sufficient  for  the  deliveries  needed  in  speculative 
markets.  Several  important  commodities,  such  as  wheat 
and  corn,  are  capable  of  being  graded  so  as  to  fulfill  the 
requirements;  but  the  number  of  commodities  that  can  be 
traded  in  according  to  the  system  that  prevails  upon  the 
exchanges  is  limited. 

Organized  speculation  has  its  raison  d'etre  in  fluctuations 
in  prices.  Therefore  a  commodity  that  by  law  or  custom  is 
not  the  subject  of  fluctuations  would  not  be  suitable  for 
speculation.  Such  commodities  could  not  be  speculated  in 
with  profit,  and  speculators  in  them  would  not  be  per- 
forming a  service. 

In  all  important  exchanges  the  trading  is  restricted  to 
certain  members  or  other  persons  who  are  carefully  desig- 


FEATURES  OF  ORGANIZED  SPECULATION      17 

nated.  To  be  a  member  and  to  have  the  right  to  trade  or  to 
have  one's  representative  on  the  floor  is  considered  a  privi- 
lege of  great  value,  and  the  profit  arising  therefrom  is  so 
great  in  some  exchanges  that  a  large  price  is  often  paid  for 
membership. 

The  exchange  is  a  voluntary  organization,  although  its 
methods  of  doing  business  are  always  more  or  less  regu- 
lated by  governments.  The  amount  of  this  regulation 
varies  in  different  countries;  and  it  will  readily  be  imagined 
that  it  is  more  important  upon  the  Continent  than  in 
England  or  the  United  States.  In  the  Paris  Bourse,  for 
example,  those  who  constitute  the  Parquet,  or  original 
part  of  the  exchange,  resemble  officers  of  the  Government 
in  their  appointment  and  their  status.  But  the  facilities 
that  are  created  by  bringing  together  the  different  interests 
are  most  of  them  due  to  the  enterprise  of  the  exchange 
members  in  cooperating  for  their  mutual  good. 

The  form  of  organization  is  quite  different  in  the  various 
exchanges.  The  New  York  Stock  Exchange  is  not  incor- 
porated. On  the  other  hand,  the  Chicago  Board  of  Trade 
and  numerous  other  exchanges  in  this  country  have  been 
duly  incorporated  by  the  several  states  in  which  they  are 
respectively  located.  There  are  in  most  cases  a  president,  a 
treasurer,  a  secretary,  a  board  of  directors  or  governors, 
and  a  number  of  committees,  and  these  officials  have  charge 
of  the  several  activities  of  the  exchange. 

It  is  usual  for  an  exchange  to  have  a  very  wide  sphere  of 
action;  and  its  officers  and  members  enter  into  a  number  of 
matters  not  considered  by  the  ordinary  association  or  cor- 
poration. Particularly  they  supervise  contracts  between 
members,  and  declare  the  kind  of  contracts  that  may  be 
made  upon  the  exchange  and  the  manner  of  enforcing 
them.  Thus  the  New  York  Stock  Exchange  decides  on  the 
question  of  whether  a  given  stock  or  security  may  be  traded 
in;  and  when  a  particular  issue  of  stocks  or  bonds  is  ac- 
cepted for  trading,  it  is  said  to  be  "listed"  upon  that  ex- 


18         VALUE  OF  ORGANIZED  SPECULATION 

change.  It  decides  also  in  regard  to  the  manner  in  which 
certificates  of  its  listed  stocks  must  be  engraved  and  issued, 
in  order  to  prevent  any  possible  forgery  of  certificates  or 
over-issue,  and  in  every  way  serves  to  facilitate  and  make 
safe  the  trading  that  takes  place  within  its  walls. 

In  a  commodity  exchange  the  management  decides  on 
the  kinds  of  grain  or  other  commodities  which  shall  be 
regular  delivery  on  contracts,  also  on  the  place  at  which 
such  commodities  shall  be  stored  and  what  kind  of  ware- 
house receipts  shall  be  accepted  in  making  deliveries.  It 
considers  freight  rates,  storage  and  switching  charges,  and 
it  enters  in  many  other  respects  into  the  minutiae  of  the 
contracts. 

An  exchange  frequently  prescribes  the  charges  or  com- 
missions of  its  members  and  those  within  its  control,  and 
hears  complaints  from  those  who  believe  that  they  have 
been  defrauded  by  its  members.  In  some  cases  it  goes  so 
far  as  to  punish  members  by  fine,  by  suspension  of  the 
privileges  of  the  exchange,  and  even  by  expulsion  from  the 
organization. 

The  business  of  an  exchange  generally  takes  place  in  a 
large  room  or  exchange  hall,  different  parts  of  the  room 
being  used  for  different  kinds  of  transactions  according  to 
the  rules  and  customs  established.  In  a  grain  exchange  in 
this  country  the  transactions  for  future  delivery  are  usually 
made  in  a  structure  called  a  "pit,"  which  is  built  upon  the 
floor  of  the  exchange  hall.  This  pit  consists  of  a  number  of 
steps  or  stairs  arranged  in  such  a  way  that  the  brokers  can 
stand  upon  them  facing  one  another  in  an  approximate  cir- 
cle. There  may  be  several  pits,  each  for  a  different  com- 
modity, as  wheat,  corn,  oats,  or  provisions.  The  commodi- 
ties sold  for  future  delivery  in  the  pit  are  graded,  certain 
grades  being  good  delivery  according  to  the  contracts 
entered  into  and  the  rules  of  the  particular  exchanges. 
Transactions  by  sample  are  made  around  tables  which  are 
placed  about  the  room  and  on  which  are  displayed  samples 


FEATURES  OF  ORGANIZED  SPECULATION       19 

of  different  cars  or  lots  of  grain  or  other  commodities.  It  is 
not  customary,  however,  to  trade  in  stocks  or  securities  in  a 
pit.  In  the  New  York  Stock  Exchange  posts  are  provided 
which  designate  the  headquarters  for  trading  in  each  of  the 
several  stocks  and  securities. 

The  Method  of  doing  Business 

The  method  of  doing  business  by  shouting  and  gesticu- 
lating is  the  outwardly  noticeable  feature  of  a  commercial 
exchange.  As  the  visitor  first  looks  down  from  the  gallery 
upon  the  mass  of  seemingly  insane  human  beings  upon  the 
floor  of  the  exchange,  he  is  frequently  heard  to  remark  that 
he  cannot  see  how  they  can  ever  understand  one  another  or 
make  anything  out  of  it.  Yet  it  is  necessary,  in  affording  a 
perfectly  free  market,  that  a  trader  have  a  right  to  make 
any  proposition  that  he  wishes  regardless  of  the  activities  of 
others.  Hence,  in  an  exchange,  etiquette  is  waived;  and 
any  one  feels  at  liberty  to  interrupt  any  one  else,  and  to 
shout  his  proposal  at  the  top  of  his  voice  in  the  effort  to 
drown  out  the  others. 

Perhaps  the  easiest  way  of  explaining  this  method  of 
doing  business  is  by  comparing  it  with  the  manner  in  which 
an  auction  is  conducted.1  The  difference  lies  in  the  fact 
that  on  an  exchange  there  is  not  merely  one  auction  being 
conducted  at  one  time  and  place,  but  several  are  actually 
jumbled  together  in  a  kind  of  medley  or  composite  auction, 
as  it  might  be  called.  One  trader  may  be  auctioning  off  a 
parcel  of  wheat.  But  if  he  does  not  immediately  accept  any 
of  the  bids  made,  little  attention  is  paid  to  him  till  he  is 
willing  to  make  some  concession  or  till  the  situation 
changes ;  for  the  others  are  themselves  conducting  auctions 
or  bidding  at  them,  all  these  bids  and  offers  being  inter- 
mixed according  to  the  different  proposals  made  by  the 
parties.  Some  are  seeking  to  buy,  some  are  seeking  to  sell; 

1  Cf.  Annals  of  the  American  Academy  of  Political  and  Social  Science, 
vol.  xxxvm,  p.  5. 


20         VALUE  OF  ORGANIZED  SPECULATION 

and  each  is  striving  to  make  the  trade  that  he  wishes  regard- 
less of  the  activities  of  others.  The  result  of  this  method 
of  doing  business  is  all  the  confusion  and  shouting  which 
those  not  to  the  manner  born  consider  so  extraordinary. 
Dignity  and  decorum  are  little  heeded  in  this  mass  of  strug- 
gling traders;  and  the  etiquette  usually  observed  among 
business  men  is  sacrificed  in  order  that  the  purpose  of  a 
commercial  exchange  may  be  accomplished. 

The  facilities  of  a  commercial  exchange  converge 
toward  the  exchange  hall  or  room  in  which  the  trading  is 
done,  and  every  arrangement  is  made  for  communication 
with  the  outside.  Telegrams  are  received  directly  in  the 
exchange,  and  many  of  the  brokers  are  connected  with  it  by 
private  wire  or  telephone.  With  few  exceptions  no  one  is 
allowed  in  the  exchange  hall  except  the  members  and 
telegraphers,  messengers  and  other  employees  of  the 
exchange  and  of  its  members. 

The  hours  for  doing  business  are  at  the  active  business 
hours  of  the  day  when  banks  and  other  financial  institu- 
tions are  open  and  officials  and  others  can  be  consulted. 
Thus  the  regular  session  of  the  Chicago  Board  of  Trade 
takes  place  between  9.30  A.M.,  and  1.15  P.M.,  and  that  of  the 
New  York  Stock  Exchange  is  between  10  A.M.  and  3  P.M., 
except  that  on  Saturdays  the  closing  is  at  12  M.  All  trans- 
actions made  at  any  other  time  than  during  the  regular 
exchange  hours  or  at  any  other  place  than  in  the  exchange 
are  called  "curb"  transactions,  and  are  forbidden  by  its 
rules.  The  reason  why  they  are  given  that  name  is  because 
at  times  much  irregular  trading  has  been  done  by  crowds 
or  knots  of  brokers  standing  upon  the  curbstone  in  the 
street  or  upon  the  pavement.  Hence  to  the  exchange  ha- 
bitue the  word  "curb"  is  associated  with  any  trading  that 
does  not  take  place  in  the  exchange  hall  during  the  time 
fixed  for  regular  trading  by  the  rules  of  the  exchange. 

In  the  morning,  as  the  hour  for  the  opening  of  the  session 
approaches,  the  members  congregate  in  the  exchange  hall, 


FEATURES  OF  ORGANIZED  SPECULATION      21 

but  wait  for  the  exact  time  fixed  by  the  rules  before  any 
deals  are  made.  When  the  time  arrives,  the  signal  is  given 
and  the  trading  begins.  The  opening  is  especially  im- 
portant, as  conditions  are  quite  likely  to  have  changed 
since  the  preceding  session,  resulting  in  even  more  uncer- 
tainty than  usual  in  regard  to  the  next  quotations.  Upon 
the  Chicago  Board  of  Trade  the  uncertainty  and  resulting 
confusion  at  the  opening  are  so  great  that  generally  no  one 
price  can  be  fixed  upon  as  the  opening  one  in  the  case  of 
wheat  and  other  active  commodities;  but  a  range  is  quoted 
between  different  transactions  simultaneously  made.  Such 
a  range  is  sometimes  quoted  as  the  opening  of  especially 
active  stocks  upon  the  New  York  Stock  Exchange. 

The  opening  having  been  made,  the  market  usually 
becomes  quiet,  except  that  there  are  irregular  fits  and  starts 
of  activity  which  may  occur  at  any  time,  and  any  of  which 
may  develop  into  a  boom  or  panic.  But  the  mid-session  is 
usually  more  quiet  than  the  opening  or  close.  As  the  close 
.approaches,  each  broker  and  trader  is  careful  to  be  in  posi- 
tion to  note  all  circumstances  and  exercise  his  influence  to 
make  the  close  what  he  wishes  it;  for  the  closing  quotation 
is  the  price  to  be  considered  by  all  interests  till  the  opening 
next  day.  Until  the  next  session  there  are  no  dealings 
except  the  prohibited  curb  transactions. 

The  Orders 

The  speculator  or  investor,  having  arrived  at  a  conclu- 
sion in  regard  to  the  market,  gives  his  order  to  a  broker, 
who  either  acts  directly  or  through  his  representative  in 
the  exchange.  The  system  of  communication  is  so  excel- 
lent, and  the  method  of  doing  business  is  so  facilitated, 
that  the  order  can  be  executed  in  a  remarkably  short  space 
of  time.  For  instance,  suppose  the  order  be  to  buy  5000 
bushels  of  contract  wheat  for  delivery  at  such  time  during 
the  month  of  May  next  following  as  the  seller  may  deem 
expedient,  at  97f  c  per  bushel.  In  making  the  bid,  the 


22         VALUE  OF  ORGANIZED  SPECULATION 

broker  simply  shouts,  "Buy  five  May  at  three  eighths"  — 
all  the  rest  being  understood.  If  another  broker  wishes  to 
accept  the  bid,  he  simply  says,  "Sold";  or  he  makes  a  ges- 
ture or  nod  signifying  assent,  and  the  deal  is  made.  This 
quickness  in  executing  orders  by  abbreviated  speech  and 
the  use  of  the  telephone  and  telegraph  is  necessary  in  order 
that  a  trader  may  not  be  anticipated  in  a  favorable  trans- 
action by  some  one  more  alert.  Things  are  done  quickly 
upon  the  speculative  exchanges. 

An  order  given  for  execution  at  the  market  must  be  exe- 
cuted at  the  best  price  obtainable  at  the  time  the  order  is 
received.  In  case  the  broker  has  such  an  order,  he  makes 
a  bid  which  he  thinks  the  best  that  would  have  any  chance 
of  acceptance;  but  if  the  proposal  be  not  accepted,  he  makes 
a  less  advantageous  one  or  accepts  some  offer  from  others. 
Often  the  market  will  remain  for  several  minutes  at  a  cer- 
tain point  at  which  considerable  trading  takes  place.  In 
this  case  the  broker's  duty  is  simplified,  for  he  can  usually 
find  some  one  who  will  make  a  trade  at  the  going  price.  But 
at  other  times  the  market  is  what  is  called  "  sellers  "- 
that  is,  there  are  sellers  at  a  certain  price,  but  no  bidders 
except  at  a  lower  price.  Or  the  opposite  may  be  true;  and 
there  may  be  buyers  at  a  certain  figure,  but  no  sellers. 
These  conditions  of  the  market,  which,  by  the  way,  are  the 
usual  ones,  call  for  care  on  the  part  of  a  broker  in  executing 
orders;  but  he  has  no  discretion,  and  must  deal  on  the  best 
terms  he  can  if  the  order  be  for  execution  at  the  market. 

Other  orders  are  resting  or  waiting  orders  on  which  a 
limit  is  fixed  for  execution.  For  instance,  a  broker  may 
receive  an  order  to  buy  100  shares  of  a  certain  stock  at  95 
or  better.  In  that  case  he  waits  till  the  trading  nears  95,  and 
then  bids  that  figure  till  he  executes  the  order  or  until  the 
market  moves  so  far  away  that  bidding  would  be  futile. 

"Stop  loss"  orders  constitute  another  form  of  orders  for 
the  execution  of  which  the  continuous  market  of  the  ex- 
changes gives  every  facility.  A  stop  order  is  different  in 


FEATURES  OF  ORGANIZED  SPECULATION     23 

one  important  respect  from  the  example  of  a  waiting  order 
just  given.  It  is  intended  to  stop  losses  at  a  point  beyond 
which  the  trader  is  not  willing  to  run  the  risk  of  a  further 
adverse  movement.  Thus,  let  us  suppose  that  a  trader  be 
the  owner  of  a  certain  stock,  and  that  he  prefers  to  have  his 
stock  closed  out  at  87  rather  than  run  the  risk  of  a  decline 
below  that  figure.  Accordingly  he  instructs  his  broker  to 
stop  his  loss  by  selling  his  stock  when  87  is  reached.  The 
broker  may  not  be  able  to  sell  the  stock  at  exactly  the 
figure  designated;  because,  to  continue  with  the  illustration 
just  given,  the  market  may  pass  87  so  rapidly  that  nothing 
can  be  done  until  say  8&|  is  reached.  However,  in  the  con- 
tinuous market  afforded  by  the  exchanges  such  an  order 
can  usually  be  executed  at  the  limit  fixed.  Only  the  merest 
approach  to  stop  orders  can  be  found  in  business  outside  the 
speculative  exchanges,  as  a  continuous  market  is  necessary 
to  execute  them. 

Other  forms  of  resting  or  waiting  orders  than  those  men- 
tioned are  orders  for  execution  at  the  opening  or  close, 
or,  for  instance,  at  10  o'clock  or  at  12  o'clock.  A  trader 
may  fix  any  limit  that  he  wishes  for  the  execution  of  his 
order. 

Somewhat  similar  to  stop  orders  are  hedging  orders;  for  a 
hedge  is  intended  as  a  protection  against  loss.  But  a 
hedger  does  not  necessarily  wait  till  a  deal  has  gone  against 
him  before  putting  on  the  hedge.  Strictly  speaking,  when  a 
speculator  or  investor  hedges,  he  enters  into  a  deal  of  a  dif- 
ferent nature  from  the  original  one  in  the  hope  that,  in  case 
the  original  deal  shows  a  loss,  the  hedge  may  show  a  profit. 
One  stock,  for  instance,  may  be  bought  as  a  hedge  upon 
a  deal  in  another  stock;  or  a  commodity  may  be  bought  or 
sold  as  a  hedge.  There  are  thousands  of  schemes  for  hedg- 
ing, some  of  which  are  useful  and  some  of  which  are  falla- 
cious; and  the  orders  that  result  from  them  affect  the 
supply  and  demand  for  commodities  and  securities  upon 
the  exchanges.  Thus  hedging  orders  on  grain  powerfully 


24         VALUE  OF  ORGANIZED  SPECULATION 

affect  the  Chicago  market,  as  Chicago  has  the  broadest 
grain  market  and  consequently  the  best  opportunities  to 
place  hedges.  At  the  time  of  marketing  grain,  for  instance, 
a  great  deal  of  selling  is  done  in  Chicago  as  a  hedge  on  pur- 
chases made  elsewhere;  and  hence  the  supply  is  affected 
and  an  important  influence  upon  prices  exercised. 

Fraudulent  orders  are  also  to  be  considered.  A  trader 
may  give  out  orders  to  one  broker  to  buy  a  stock  and  orders 
to  another  broker  to  sell  the  same  stock  under  such  condi- 
tions that  both  the  buying  and  selling  orders  are  likely  to 
be  executed  at  the  same  time.  The  principal  in  the  case 
supposed  may  as  a  result  be  selling  to  himself  through  dif- 
ferent brokers;  and  the  orders  that  he  gives  to  bring  about 
this  result  are  called  "matched  orders."  A  sale  in  which  a 
trader  sells  to  himself  through  matched  orders  given  for 
manipulative  purposes  is  called  a  "wash  sale,"  and  such  a 
transaction  is  of  course  a  fictitious  one. 

The  purpose  of  giving  matched  orders  and  of  making 
wash  sales  is  to  make  quotations  which  a  manipulator  may 
desire,  and  so  to  move  a  market  either  up  or  down  with  a 
minimum  of  loss  to  the  manipulator.  For  instance,  suppose 
that  Union  Pacific  be  selling  at  180  and  the  order  be  given 
to  sell  100  shares  of  the  stock  at  179  and  to  offer  it  down  to 
that  figure,  while  another  broker  is  given  an  order  to  buy 
100  shares  at  179.  The  broker  who  has  the  buying  order 
would  bid  179.  But  no  one  under  the  conditions  supposed  is 
likely  to  accept  the  bid  except  the  broker  who  has  the  sell- 
ing order;  and,  when  he  accepts  it,  the  quotation  is  made 
and  goes  out  at  179,  and  the  stock  is  said  to  have  been 
"marked  down"  to  that  figure.  Since  the  manipulator 
both  buys  and  sells  at  179,  it  will  readily  be  seen  that  he 
suffers  no  loss  except  such  commissions  as  he  may  pay. 

It  appears  to  have  been  the  intention  of  the  founders  of 
the  New  York  Stock  Exchange  and  of  other  exchanges  that 
the  members  were  to  act  only  as  brokers  for  others.  But  at 
the  present  time  there  are  many  members  of  the  exchanges 


FEATURES  OF  ORGANIZED  SPECULATION     25 

who  trade  principally  for  themselves.  Upon  the  New  York 
Stock  Exchange  these  are  called  "room-traders." 

In  the  London  Stock  Exchange  a  system  prevails 
whereby  some  members  are  classified  as  dealers  or  jobbers 
and  others  as  brokers.  Upon  that  exchange  the  brokers  do 
not  execute  their  orders  directly  with  other  brokers  or 
traders  as  at  New  York.  But  the  broker  who  has  received 
an  order  to  buy  or  sell  a  certain  stock  seeks  out  one  of  the 
jobbers  or  dealers  just  mentioned  and  ascertains  from  him 
the  prices  at  which  he  will  trade.  The  jobber  usually  names 
two  figures  —  one  at  which  he  will  sell  and  a  certain  lower 
price  at  which  he  will  buy,  either  one  of  which  proposals  the 
broker  is  at  liberty  to  accept  according  to  the  nature  of  his 
order. 

In  all  forms  of  exchange  trading,  the  very  fact  that  many 
of  the  trades  are  executed  by  persons  other  than  those  who 
run  the  risk  of  them  makes  the  question  of  brokerage  or 
agency  important.  If  all  deals  were  made  personally  by  the 
traders  who  originate  them,  the  business  of  the  exchanges 
would  be  to  an  extent  simplified.  It  is  necessary,  therefore, 
to  become  acquainted  with  the  system  of  putting  in  orders 
and  of  executing  them  in  order  to  understand  many  of  the 
vagaries  of  the  market. 

Distributing  Quotations  and  News 

When  a  transaction  is  made,  the  quotation  is  at  once  sent 
out  by  a  remarkably  developed  system.  There  are  those  in 
attendance  who  understand  the  abbreviated  forms  of 
speech  and  the  methods  used  in  this  kind  of  trading,  and 
hence  are  able  to  give  the  quotations  to  the  telegraphers  as 
fast  as  they  are  made.  The  brokers  and  traders  also  help 
in  informing  the  telegraphers  of  any  deals  that  may  have 
escaped  attention,  thus  making  the  quotations  complete. 
In  the  broker's  office  the  quotations  are  received  by  a 
telegrapher,  who  places  them  upon  a  blackboard  where  all 
can  see  them. 


26         VALUE  OF  ORGANIZED  SPECULATION 

There  is  also  another  service  whereby  the  quotations  are 
printed  by  a  little  mechanism  called  a  "ticker"  upon  a  long 
strip  of  paper  called  the  "tape."  This  apparatus  dispenses 
with  the  telegrapher  at  the  receiving  end,  and  is  commonly 
used,  not  only  by  brokers,  but  by  hotels,  restaurants,  and 
clubs  whose  members  wish  to  be  informed  of  changes  in 
values.  The  wide  extent  to  which  such  quotations  are  thus 
disseminated  is  remarkable. 

Besides  the  quotation  ticker  above  described,  there  is  the 
news  or  gossip  ticker  which  prints  the  news  in  regard  to 
speculation  and  the  course  of  trade.  The  collection  and  dis- 
tribution of  news,  it  may  be  mentioned,  is  one  of  the  most 
important  functions  of  the  speculative  exchanges,  and  the 
organization  of  speculation  gives  encouragement  to  those 
who  collect  and  disseminate  it. 

The  agency,  however,  which  is  the  most  important  in  dis- 
tributing the  quotations  and  news  bearing  upon  the  market 
is  the  periodical  press.  All  periodicals  except  those  devoted 
to  the  interests  of  some  specialty  of  a  totally  dissimilar 
character  give  much  space  to  organized  markets.  Elabor- 
ate reports  covering  the  fluctuations  and  news  from  the 
exchanges  are  prominent,  and  editors  are  specially  em- 
ployed to  write  articles  giving  opinions  of  market  move- 
ments and  making  predictions  in  regard  to  future  fluctua- 
tions. 

The  organization  of  speculation  shows  itself  characteris- 
tically in  the  development  of  the  facilities  for  communica- 
tion just  mentioned.  No  other  business  is  organized  in  this 
manner.  A  trader  upon  an  exchange  may  travel  through- 
out his  country  and  everywhere  receive  intelligence  in 
regard  to  his  business.  He  has  but  to  look  at  the  ticker 
which  he  finds  so  widely  distributed  or  to  purchase  a  news- 
paper in  order  to  find  news,  quotations,  and  opinions.  The 
business  done  upon  the  exchanges  is  the  best  advertised  of 
any,  and  the  publicity  which  exists  in  regard  to  it  assists 
greatly  in  making  a  free  market. 


FEATURES  OF  ORGANIZED  SPECULATION     27 

Organized  speculation  thus  marks  the  culmination  of  the 
inventions  for  the  gathering  and  disseminating  of  intelli- 
gence in  regard  to  commerce.  It  is  different  from  any  of  the 
others,  yet  it  utilizes  them  all.  The  railroad,  the  telegraph, 
the  telephone,  the  mail  service,  and  other  modern  inven- 
tions and  institutions  are  the  constituent  units  or  members 
which  are  finally  united  into  one  system  with  organized 
speculation  as  the  principal  factor. 

The  quotations  and  intelligence  of  a  particular  exchange 
are  not  only  communicated  directly  to  the  brokers  and 
traders  who  deal  in  it,  but  to  other  exchanges  as  well.  The 
grades  of  the  different  commodities  traded  in  vary  with  the 
different  exchanges,  and  of  course  the  freight  or  carriage 
must  be  allowed  for  in  calculating  the  values  of  commodi- 
ties at  the  respective  locations.  Notwithstanding  these  and 
other  conditions  which  must  be  taken  into  consideration, 
the  markets  sympathize  with  one  another,  and  in  most  cases 
move  in  harmony.  This  is  accomplished  through  the  excel- 
lent system  of  distributing  quotations,  and  the  trading 
which  grows  out  of  it.  Those  who  thus  keep  the  different 
markets  in  line  are  called  arbitragers.  Their  function  can 
best  be  illustrated  by  a  practical  example. 

Let  us  suppose  that  upon  the  Chicago  Board  of  Trade  a 
cablegram  is  received  announcing  that  the  market  for 
wheat  at  Liverpool  has  declined.  Unless  the  arbitrager  has 
reason  to  believe  that  the  cause  of  this  decline  is  a  local 
matter  peculiar  to  the  Liverpool  market,  he  feels  that  relat- 
ive values  in  the  two  commercial  centres  should  remain 
the  same;  and  he  reasons  that  it  is  probable  that,  through 
diminution  of  shipments  from  this  country  to  the  United 
Kingdom  or  from  like  causes,  the  two  markets  will  ulti- 
mately be  brought  into  line.  But  it  is  the  business  of  the 
speculator  to  look  ahead,  and  he  sees  here  a  chance  to  make 
money  by  trading  on  the  probability  that  prices  upon  the 
two  markets  will  resume  their  former  proportion.  Thus  the 
arbitrager,  acting  through  his  own  selfish  interest,  yet  with 


28          VALUE  OF  ORGANIZED  SPECULATION 

as  useful  a  commercial  purpose  as  any,  proceeds  to  buy 
wheat  in  the  Liverpool  market  and  sell  it  in  the  Chicago 
market.  But  the  buying  at  Liverpool  increases  the  demand 
at  that  place  and  so  has  a  tendency  to  put  that  market  up; 
while  the  selling  at  Chicago  increases  the  supply  which 
there  presses  upon  the  market,  and  of  course  tends  to  de- 
press the  price  at  that  place.  The  buying  and  selling  of  the 
arbitragers  and  speculators  in  the  manner  just  described 
are  so  effective  that  proportionate  prices  between  two  mar- 
kets, in  case  they  get  out  of  line,  are  generally  quickly 
restored.  Hence  the  speculator  in  these  arbitrage  transac- 
tions anticipates  changes  in  value  and  buys  and  sells  in 
order  to  take  advantage  of  them;  only  in  this  instance  it  is 
not  changes  in  specific  values  that  the  speculator  is  fore- 
casting, but  changes  in  relative  values  between  two 
markets.1 

In  arbitrage  dealings  the  smallest  fractions  are  consid- 
ered, and  the  time  necessary  to  complete  such  transactions 
is  so  reduced  that  two  markets  may  move  in  almost  exact 
harmony.  If  they  appear  to  get  out  of  line  for  any  appre- 
ciable length  of  time,  all  traders  look  to  local  changes  in 
supply  and  demand  as  the  cause,  and  come  to  consider  the 
new  proportion  established  as  the  proper  one.  In  arbitrage 
upon  grain  and  other  commodities  the  varying  freight 
rates,  the  local  conditions,  and  technical  position  of  the 
market  must  be  kept  in  mind.  As  regards  stocks  and  se- 
curities, however,  these  complications  are  not  so  important; 
hence,  as  a  result  of  arbitrage,  stocks  that  have  a  wide 
market  should  have,  and  do  have,  substantially  the  same 
value  the  world  over;  for  the  cost  of  transporting  either 
stocks  or  money  or  of  dealing  in  exchange  is  inconsiderable 
when  any  but  the  smallest  transactions  are  undertaken. 

To  sum  up:  the  system  of  distributing  news  and  quota- 

1  For  the  view  that  arbitrage  is  not  speculation  but  trade,  see  Emery, 
Speculation  upon  the  Produce  and  Stock  Exchanges  of  the  United  States, 
p.  138. 


FEATURES  OF  ORGANIZED  SPECULATION      29 

tions  brings  together  upon  an  exchange  the  transactions  of 
widely  separated  traders,  and  the  rapid  communication 
between  the  different  exchanges  gives  special  prominence  to 
modern  methods,  so  that  all  exchanges  move  substantially 
as  one  in  the  making  of  prices.  Commerce  is  thus  unified, 
unfortunate  differences  between  localities  are  ironed  out, 
facilities  for  information  and  trade  are  thrown  open  to  all, 
and  the  possible  unfair  advantages  which  one  community 
might  secure  over  another  are  to  a  great  extent  curtailed. 

Describing  the  Market 

Organized  speculation  has  its  peculiar  language  which  is 
employed  in  describing  the  market;  but  the  technical  terms 
are  not  usually  from  Latin  or  any  other  classical  tongue. 
On  the  contrary,  many  of  them  are  derived  from  the  lan- 
guage of  the  street  or  from  slang.  Some  of  these  terms  have 
been  already  defined,  but  it  is  necessary  to  give  the  mean- 
ing of  others  in  order  that  subsequent  explanations  may  be 
understood. 

The  familiar  terms  "bull"  and  "bear"  are  explained  and 
easily  remembered  by  referring  to  the  habits  of  the  animals 
from  which  the  terms  are  derived.  A  bull  is  always  seeking 
to  toss  things  upward  with  his  horns.  Hence  those  who 
seek  a  rise  in  the  market  are  called  bulls.  But  the  habits 
and  tendencies  of  a  bear  are  quite  different.  He  is  always 
pulling  things  downward  with  his  claws.  Hence  it  is  espe- 
cially appropriate  that  those  who  seek  to  pull  down  prices 
are  called  bears. 

The  words  "bull"  and  "bear"  are  not  used  in  their  com- 
mercial sense  in  outside  business,  but  there  are  bulls  and 
bears  everywhere  in  trade.  The  business  man  who  needs  a 
horse,  for  instance,  is  extremely  bearish  in  his  talk.  He  is  a 
bear  on  horseflesh  because  he  is  seeking  to  purchase,  and  his 
interest  lies  in  depressing  the  price.  Hence  he  depreciates 
his  neighbor's  property  in  much  the  same  way  that  the  bear 
on  the  speculative  exchange  seeks  to  depress  values.  But 


30         VALUE  OF  ORGANIZED  SPECULATION 

when  a  man  has  a  horse  which  he  bought  for  speculative  or 
other  purposes,  he  is  likely  to  become  a  pronounced  bull; 
and  property  that  he  may  have  recently  been  depreciating 
has  now  become  of  great  value  and  is  highly  extolled. 
Human  nature  is  the  same  upon  the  exchanges,  but  the 
organization  and  bringing  together  of  large  numbers  of 
traders  make  the  characteristics  of  bull  and  bear  more 
prominent  than  in  outside  trade.  Not  only  are  the  words 
used  in  the  sense  above  described,  but  adjectives  are 
formed  from  them.  Thus,  when  a  market  shows  a  tendency 
to  go  up,  it  is  said  to  be  "bullish";  but  if  the  tendency  be 
downward,  it  is  said  to  be  "bearish." 

An  upward  movement  of  a  market  accompanied  by  great 
excitement  and  speculative  enthusiasm  is  called  a  "boom." 
A  panic,  on  the  contrary,  occurs  when  speculators  lose  con- 
fidence and  numbers  of  them  seek  to  sell  at  the  same  time, 
causing  demoralization  and  a  great  fall  in  prices.  When  a 
market  fluctuates  within  narrow  limits,  it  is  said  to  be 
"choppy."  If  a  market  does  not  seem  to  have  any  well- 
defined  tendency,  but  moves  with  eccentric  fits  and  starts, 
—  some  securities  or  commodities  advancing,  and  others 
declining,  —  it  is  said  to  look  "spotty"  or  "spotted." 
When  a  market  shows  a  tendency  to  go  up,  it  is  said  to  look 
"strong";  but  if  it  seems  inclined  to  fall,  it  is  said  to  look 
"weak."  A  "bulge"  is  a  sudden  bull  movement;  but  a 
"slump"  or  "break"  is  synonymous  with  a  decline. 

In  describing  the  distance  that  a  market  moves,  the 
word  "point"  is  often  used.  In  securities  it  means  one  dol- 
lar per  share  of  stock,  or  one  per  cent  on  the  par  value  of  a 
stock  or  bond;  in  grain  one  cent  per  bushel  is  meant;  while 
in  cotton,  a  point  is  one  hundredth  of  a  cent.  The  word 
"point"  is  also  used  as  synonymous  with  "tip,"  or  advice 
to  buy  or  sell  a  stock  or  commodity. 

A  "syndicate"  is  a  group  of  capitalists  who  unite  their 
resources  to  accomplish  some  financial  or  business  object. 
A  "clique"  or  "pool"  is  much  the  same  as  a  syndicate, 


FEATURES  OF  ORGANIZED  SPECULATION      31 

except  that  in  the  speculative  markets  the  terms  are  usu- 
ally used  in  describing  a  group  of  speculators  who  are  seek- 
ing by  uniting  their  interests  to  manipulate  the  market. 

Margin  Trading 

The  practice  of  leaving  a  deposit  of  money  to  bind  a  bar- 
gain, and  as  security  for  faithful  performance  of  a  contract, 
is  so  common  in  all  kinds  of  business  as  scarcely  to  need 
comment.  In  real  estate  transactions,  the  value  which  a 
property  has  over  and  above  any  mortgage  is  called  an 
"equity."  When  chattels  or  other  property  are  bought, 
partly  for  cash,  partly  on  time,  the  cash  payment  is  called 
in  book  language,  "earnest  money";  or,  in  common  busi- 
ness colloquialism,  it  is  said  that  the  buyer  has  made  a  cer- 
tain "payment  down."  The  balance  in  such  a  case  may  be 
paid  in  installments,  or  the  seller  may  retain  his  lien  upon 
the  property  indefinitely,  according  to  the  terms  of  the 
particular  contract  entered  into. 

In  the  parlance  of  the  exchanges,  however,  when  a 
trader  buys  partly  for  cash,  partly  on  time,  the  amount  of 
money  which  he  puts  into  the  deal  is  called  a  "margin." 
The  name  is  all  that  differentiates  it  from  a  similar  deposit 
in  numerous  forms  of  transactions  entered  into,  in  all  kinds 
of  outside  business  every  day.  There  is  no  difference  in 
principle  between  margin  trading  and  those  other  forms  of 
business  transactions,  but,  upon  the  exchanges,  the  margin 
deals  are  much  more  frequent,  and  the  margins  necessary 
are  much  smaller  than  are  required  elsewhere.  A  broker  in 
stocks,  for  instance,  will  take  trades  for  a  client  for  ten  per 
cent  margin  or  even  less.  After  purchasing  a  stock  on  the 
small  margin  mentioned,  he  will  hypothecate  it;  but  the 
bank,  in  making  the  loan,  will  lend  him  only  about  eighty 
per  cent  of  its  value.  Thus  the  margin  which  the  bank 
requires  is,  say  twenty  per  cent,  or  roughly  speaking 
double,  even  more  than  double  in  many  cases,  what  the 
broker  gets.  The  brokers  and  commission  men  are  thus 


32         VALUE  OF  ORGANIZED  SPECULATION 

seen  to  have  a  system  of  making  transactions  with  the 
smallest  of  margins  or  security.  This  is  one  of  the  import- 
ant features  of  dealing  upon  the  exchanges  which  will  be 
referred  to  later;  for,  though  the  principle  of  margin  trading 
is  seen  everywhere  in  business,  the  size  of  the  margin  has 
the  most  far-reaching  effects. 

Future  Delivery 

In  general  business,  when  a  purchase  is  made,  delivery 
may  be  immediate  or  it  may  be  put  off  until  a  future  time. 
A  contract  in  which  the  delivery  is  deferred  may  be  under- 
taken from  a  variety  of  reasons.  Thus  the  seller  may  not 
have  the  goods  ready  for  delivery  at  the  time  the  contract  is 
entered  into,  or  they  may  not  even  be  in  existence  at  that 
time,  or  the  buyer  may  not  be  ready  to  receive  them.  For 
instance,  a  builder  agrees  to  deliver  a  building  to  a  party 
within  a  certain  specified  time.  At  the  date  of  making  the 
contract,  he  may  have  none  of  the  materials,  machinery,  or 
labor  at  hand;  but,  after  the  contract  is  made,  he  executes 
it  by  buying  the  necessary  supplies  and  hiring  the  necessary 
labor.  There  are  many  other  kinds  of  business  like  that  of 
the  builder,  in  which  it  is  customary  to  make  the  goods 
after  they  are  sold.  Referring  to  merchandising,  there  are 
many  kinds  of  merchants  who  make  a  practice  of  selling 
goods  before  they  are  purchased  from  the  wholesaler. 

Upon  the  speculative  exchanges  we  have  practices  some- 
what similar  in  their  nature.  There  are  the  cash  or  "spot" 
transactions,  in  which  a  commodity  or  security  is  delivered 
soon  after  the  contract  is  made;  and  we  have  "future" 
transactions,  in  which  delivery  may  be  deferred  to  a  more 
distant  period.  The  time  that  may  elapse  before  delivery 
is  different  in  different  exchanges,  and  there  is  a  latitude  in 
the  particular  terms  that  may  be  agreed  upon  by  the  par- 
ties. In  the  New  York  Stock  Exchange,  in  the  case  of  a 
regular  transaction,  there  is  delivery  upon  the  next  day 
after  a  trade  is  made.  On  the  European  bourses  an  account 


FEATURES  OF  ORGANIZED  SPECULATION      33 

system  prevails  among  brokers,  a  period  of  time,  as  a  fort- 
nightly period,  being  fixed  for  settlement,  in  something  the 
same  manner  (waiving  particular  customs  and  technicali- 
ties) as  the  first  of  the  month  is  often  regarded  as  a  day  of 
settlement  in  other  kinds  of  business  in  some  parts  of  this 
country. 

In  the  dealings  in  commodities  upon  the  speculative  ex- 
changes, while  the  delivery  is  no  different  in  principle  from 
any  other  form  of  future  delivery,  it  is  usually  for  a  period 
of  time  computed  in  a  different  manner.  Instead  of  buying 
grain  to  be  paid  for,  say  on  the  first  of  the  month  or  on 
sixty  days'  time,  the  speculator  usually  buys  what  is  tech- 
nically known  as  a  "future."  Thus  the  speculator  buys 
wheat  to  be  delivered  some  time  in  September  at  the 
seller's  option.  Yet  such  a  contract  is  no  different  in  its 
essence  from  any  contract  for  delivery  at  a  future  time  in  any 
business,  except  that,  instead  of  delivery  being  made  on  or 
before  a  certain  specified  day,  it  is  to  be  within  certain 
hours  on  any  business  day  in  the  specified  month. 

An  "option"  is  a  contract  in  which  the  buyer  or  seller 
has  some  choice  as  to  whether  he  shall  perform  the  contract 
or  as  to  the  terms  under  which  it  may  be  performed.  The 
most  common  use  of  the  word  is  as  a  synonym  for  the  term 
future.  Thus,  when  it  is  said  that  a  trader  has  sold  the  May 
future  or  option,  the  meaning  intended  is  that  he  has  sold  a 
certain  commodity,  as  5000  bushels  of  wheat,  for  delivery 
in  May.  The  option  lies  with  the  seller  as  to  the  time  in 
May  at  which  he  shall  deliver.  It  is  not  allowable  to  de- 
liver before  the  month  of  May  has  arrived,  but  he  must 
deliver  at  some  time  during  that  month  on  or  before  the 
last  business  day. 

The  form  of  option  just  mentioned  is  not  used  in  stock 
transactions,  but  it  is  allowable,  for  example,  upon  the 
New  York  Stock  Exchange  to  trade  in  buyer's  and  seller's 
options  to  deliver  stock  for  not  less  than  four  nor  more 
than  sixty  days.  To  take  an  illustration,  let  us  suppose 


34          VALUE  OF  ORGANIZED  SPECULATION 

that  100  shares  of  a  certain  stock  be  sold  at  107  "seller  30." 
Such  an  expression  means  a  contract  whereby  the  seller 
must  deliver  the  stock  within  thirty  days  of  the  time  that 
the  contract  was  made,  and  that  he  may  deliver  it  on  any 
day  within  the  thirty  days  at  his  option.  The  buyer's 
option  is  the  same  as  that  of  the  seller's  option  just 
mentioned,  except  that  the  buyer  may  choose  the  time 
within  the  specified  period  at  which  the  contract  is  to  be 
executed. 

Short  Selling 

"Short  selling"  occurs  whenever  a  party  sells  something 
for  future  delivery  which  he  does  not  own  at  the  time  when 
the  sale  is  made.  Here,  as  elsewhere,  it  is  principally  the 
name  which  differentiates  the  proceeding  which  takes  place 
upon  the  exchange  from  other  business.  Thus,  if  we  apply 
the  term  "short  seller "  to  the  builder  who  sells  the  building 
before  it  is  built,  it  would  be  difficult  to  point  out  any  essen- 
tial difference  between  such  a  transaction  and  a  short  sale 
on  an  exchange.  But  in  organized  speculation,  short  sales 
are  almost  as  common  as  purchases  for  long  account.  A 
perfect  system  has  been  developed  so  that  the  bear  may 
sell  before  he  buys  just  as  easily  as  the  bull  may  buy  before 
he  sells.  In  the  pit  no  one  inquires  whether  a  broker  who  is 
offering  to  sell  wheat  owns  it  at  the  time  when  the  sale  is 
made.  If  a  trader  wishes  to  buy  at  the  price  mentioned, 
he  accepts  the  offer;  the  trade  is  entered  on  the  cards  of 
the  parties  concerned,  and  passes  on  to  the  clerical  force 
to  be  settled  by  actual  delivery  or  the  payment  of  differ- 
ences, according  to  the  wishes  of  the  principals  in  the 
trade. 

Such  is  the  facility  with  which  short  sales  are  made  that 
the  term  itself  is  hardly  used  among  traders  and  brokers. 
The  client  simply  tells  his  broker  to  sell,  if  he  wishes  a  short 
deal  made,  or  to  buy,  if  a  bull  deal  is  desired,  and  a  trader, 
who  is  buying  and  selling  all  day,  may  not  know  exactly 


FEATURES  OF  ORGANIZED  SPECULATION      35 

how  his  trades  are  to  be  made  up ;  for,  when  he  receives  his 
statement,  he  finds  one  column  for  purchases  and  another 
for  sales,  with  the  dates  of  course  mentioned,  but  with  no 
memoranda  as  to  whether  the  deals  were  originally  made 
for  long  or  for  short  account. 

Yet  the  very  facility  with  which  the  short  sales  are  made 
upon  the  exchanges  puts  the  short  seller  in  the  speculative 
markets  in  a  very  hazardous  position;  for  it  is  obvious  that, 
where  large  contracts  to  supply  a  certain  stock  or  com- 
modity are  made,  there  might  come  a  time  when  these 
numerous  engagements  could  be  executed  only  with  dif- 
ficulty. When  the  supply  of  the  actual  commodity  is  limited 
and  when  the  anxious  shorts  are  bidding  for  it,  in  order  to 
close  their  contracts,  we  have  the  condition  of  the  market 
which  is  called  a  "corner."  The  market  for  any  commodity 
outside  the  exchanges  can  be  cornered.  But  in  outside  busi- 
ness there  is  not  this  unwieldy  mass  of  short  sellers  to  force 
up  prices  with  a  terrible  rush.  Those  who  sell  buildings  in 
advance,  for  example,  know  that  there  is  little  likelihood 
of  the  market  for  building  materials  being  cornered.  The 
price  may  be  raised  before  the  builder  is  ready  to  buy,  but 
he  has  little  reason  to  expect  an  oversold  market;  and  any 
combination  that  might  appear  would  concern  itself  rather 
with  getting  permanent  control  of  the  market  than  in 
attempting  to  squeeze  any  one  by  sensational  or  violent 
fluctuations.  All  of  these  questions,  however,  will  be 
referred  to  later. 

The  fact  that  the  short  seller  is  so  prominent  upon  a 
speculative  exchange  results  in  an  abbreviated  nomencla- 
ture to  designate  him  and  his  opposite.  Thus  a  trader  who 
has  made  a  short  sale  is  called  "a  short";  and  one  who  has 
purchased  expecting  a  rise  is  called  "a  long."  When  a  short 
seller  wishes  to  close  his  contract,  he  makes  a  purchase 
which  is  called  "covering  his  short."  When,  on  the  con- 
trary, a  long  purchaser  closes  his  contract  by  selling,  it 
is  said  that  he  "liquidates"  or  "unloads";  and  when  a 


36         VALUE  OF  ORGANIZED  SPECULATION 

clique  or  syndicate  finally  disposes  of  a  mass  of  securities 
that  they  have  been  marketing,  it  is  said  that  the  securities 
have  been  "distributed"  or  "digested." 

Borrowing 

Let  us  suppose  that  a  customer  comes  to  a  hardware 
merchant  and  asks  for  a  particular  kind  of  hammer,  and  the 
merchant  finds  that  he  does  not  have  the  exact  article 
wanted  in  stock.  When  such  a  case  arises,  the  merchant 
frequently  offers  to  send  to  the  wholesaler,  or  perhaps  he 
will  say  he  might  "pick  it  up  around  town."  The  merchant 
then  goes  to  one  of  his  fellow  dealers,  tells  him  he  has  an 
order  for  such  a  hammer,  and  asks  if  he  can  borrow  one; 
promising  to  return  a  precisely  similar  hammer  at  a  later 
time.  The  proposal  being  assented  to,  the  merchant  receives 
the  hammer  and  delivers  it  to  his  customer  in  the  regular 
course  of  business.  He  then  orders  a  stock  of  the  hammers 
from  the  wholesaler;  and  when  they  arrive,  he  hands  one  of 
them  to  the  merchant  from  whom  one  was  borrowed  and 
thus  pays  the  loan. 

There  are  different  methods  by  which  a  merchant  who 
has  sold  an  article  that  he  does  not  own  may  settle  the 
transaction,  but  in  the  illustration  above  given,  one 
method  is  called  to  mind  by  which  such  a  transaction  is 
sometimes  adjusted.  Upon  the  New  York  Stock  Exchange, 
however,  this  method  is  erected  into  a  system;  and,  if  a 
trader  sells  a  stock  for  regular  delivery  that  he  does  not  at 
the  time  own,  his  brokers  may  borrow  the  stock  for  him, 
using  the  same  to  make  delivery.  The  manner  in  which 
this  process  is  conducted  upon  the  New  York  Stock 
Exchange  is  as  follows :  — 

After  exchange  hours  the  brokers  assemble  for  the  bor- 
rowing and  lending  of  stocks,  and  those  who  thus  congre- 
gate are  called  the  "loan  crowd."  When  a  trader  has  sold  a 
stock  that  he  does  not  own,  his  broker  goes  to  the  loan 
crowd  and  borrows  the  stock  according  to  the  rules  and 


FEATURES  OF  ORGANIZED  SPECULATION      37 

customs  of  the  exchange.  When  the  loan  is  made,  he  pays 
the  lender  the  market  value  of  the  stock,  which  remains  on 
deposit  till  the  loan  is  canceled.  During  the  life  of  the  loan 
the  deposit  may  be  changed  to  correspond  to  the  fluctuat- 
ing value  of  the  stock.  The  terms  upon  which  such  a  loan  is 
made  are  usually  that  the  lender  of  the  stock  must  pay 
interest  upon  the  money  which  he  receives  as  security.  The 
interest  which  is  paid  in  such  a  case  is  called  the  "loaning 
rate."  It  varies  according  to  the  demand  and  supply  of  the 
stock  for  lending  purposes  and  according  to  general  finan- 
cial conditions.  In  some  cases  under  the  law  of  supply  and 
demand  no  interest  or  loaning  rate  is  charged,  in  which  case 
the  stock  is  said  to  be  lent  "flat."  In  other  cases  the  de- 
mand for  the  stock  may  be  so  great  that  the  borrower  of  it 
may  not  only  be  obliged  to  forego  interest  upon  the  money 
that  he  has  deposited,  but  he  may  be  required  to  pay  a 
premium  for  the  use  of  the  stock. 

Substitution 

In  various  kinds  of  business  it  is  quite  common,  when  the 
dealer  receives  an  order,  to  turn  it  over  to  the  manufac- 
turer with  instructions  to  ship  direct  to  the  consumer.  In 
some  lines  of  trade  this  practice  is  the  usual  one;  while  in 
others  it  is  only  occasionally  availed  of.  For  instance,  let  us 
suppose  that  a  furniture  dealer  at  Minneapolis  sells  a 
dozen  chairs  to  a  customer  at  Duluth,  but  the  chairs  are 
sold,  let  us  say,  from  a  photograph  or  blueprint,  as  the 
dealer  does  not  carry  them  in  stock.  Now  what  does  he  do 
in  this  case?  He  orders  the  goods  from  the  manufacturer 
in,  say  Grand  Rapids,  sending  of  course  shipping  instruc- 
tions. He  might  have  them  forwarded  directly  to  Minne- 
apolis, and,  after  he  received  them,  he  could  reship  them  to 
his  customer  at  Duluth.  But,  when  we  remember  that 
every  time  goods  are  handled,  the  expense  is  increased  pro- 
portionately, we  see  the  advantage  of  a  more  direct  way. 
The  method  to  be  pursued,  of  course,  is  for  the  dealer  to 


38          VALUE  OF  ORGANIZED  SPECULATION 

order  the  goods  sent  direct  to  his  customer  at  Duluth. 
Thus  in  such  a  case  —  and  the  instance  is  by  no  means  an 
uncommon  one  —  a  merchant  sells  something  that  he  does 
not  own,  which  is  never  delivered  to  him  and  which  he 
could  not  identify  even  if  he  should  ever  see  it;  and  the 
manufacturer  finds  himself  shipping  goods  to  a  party  with 
whom  he  has  never  made  a  contract,  and  even,  in  some 
cases,  collecting  money  and  adjusting  complaints  with  such 
a  substituted  party. 

There  are  various  forms  which  similar  transactions  may 
take.  For  instance,  the  customer  might  enter  the  show 
rooms  of  the  manufacturer  and  ask  to  see  his  samples.  But 
he  would  be  told  that  the  manufacturer  did  not  sell  to 
any  except  dealers,  whereupon  the  customer  might  say  he 
would  buy  from  his  local  dealer.  The  manufacturer  would 
then  quote  the  retail  price  on  the  goods ;  and,  on  delivering 
the  same  and  collecting  his  bill,  would  remit  the  difference 
between  the  wholesale  price  and  the  retail  price  to  the 
designated  dealer. 

Every  business  has  its  peculiar  customs  and  methods  of 
adjusting  trades,  and  any  one  transaction  may  be  a  little 
different  from  others;  but  the  broad  principles  governing 
them  are  the  same.  The  evolution  is  always  towards  the 
saving  of  expense  in  making  transactions,  and  especially  in 
delivering  the  goods.  The  above  illustrations  only  show 
some  cases  where  parties  are  substituted  in  making  ship- 
ments and  collections,  and  indicate  how  little  concern  there 
is  in  general  trade  about  the  parties  to  whom  delivery  is 
made  or  whether  settlement  is  secured  by  the  payment  of 
differences.  The  method  which  yields  most  readily  to  the 
desire  for  quickness  and  saving  of  labor  is  the  one  most 
favored.  The  customs  of  the  speculative  exchanges  in  the 
matter  of  substitutions  and  payment  of  differences  do  not 
vary  from  outside  forms  of  trading  any  more  than  outside 
forms  vary  among  themselves.  These  modern  methods  are 
quite  common  in  organized  speculation;  and,  as  will  be 


FEATURES  OF  ORGANIZED  SPECULATION      39 

shown  presently,  a  system  of  book-keeping  is  especially 
devised  to  further  them. 

Cancellation  of  Trades 

The  cancellation  of  trades  as  practiced  upon  our  com- 
modity exchanges  is  one  of  the  methods  whereby  trading  is 
facilitated  and  much  of  the  clerical  labor  of  settling  is 
avoided.  The  system  can  be  best  understood  after  we  have 
considered  an  example  taken  from  a  form  of  speculation 
which  exists  outside  of  the  exchanges. 

If  the  seller  of  a  piece  of  land  changes  his  mind  in  regard 
to  the  value  of  the  land  to  him  after  the  deal  has  been 
closed,  and  if  the  buyer  also  changes  his  mind,  the  land 
may  be  bought  back,  leaving  both  seller  and  buyer  in  the 
same  position  as  before  entering  into  the  first  deal.  If  this 
second  sale  occur  before  the  transfer  is  made  on  the  first, 
the  ceremony  of  passing  the  title  would  be  an  empty  one. 
It  would  be  considered  a  superfluity  for  the  original  seller 
to  make  a  deed  to  his  grantee  when  it  is  known  that  the  land 
must  immediately  be  conveyed  back  to  him.  The  best 
method,  of  course,  would  be  to  waive  all  ceremony  as  to 
conveying  the  land  and  make  settlement  by  payment  of  the 
difference  in  price,  if  the  second  sale  be  at  a  different  figure 
from  the  original  one. 

Transactions  of  this  sort,  which  sometimes  occur  in  an 
active  market  for  real  estate,  are  frequent  among  traders 
upon  the  exchanges.  For  instance,  A  might  sell  wheat  to  B, 
and  B  might  resell  it  to  A.  If  neither  one  of  the  parties  had 
the  wheat  when  the  time  for  delivery  arrived,  they  might 
find  themselves  at  a  loss  as  to  which  would  be  required  to 
make  delivery  first.  A  might  depend  upon  B  to  deliver  to 
him  in  order  that  he  might  use  the  wheat  in  making  his  own 
delivery;  while  B  might  insist  that  A  make  delivery  first.1 
Either  of  the  parties  would  have  an  equal  right  to  bring 
action  at  law  against  the  other  for  the  delivery  of  the 
1  Cf.  Hill,  Gold  Bricks  of  Speculation,  p.  379. 


40         VALUE  OF  ORGANIZED  SPECULATION 

wheat;  and  neither  one  of  the  parties  would  be  any  better 
able  to  defend  such  an  action  than  the  other.  The  obvious 
expedient  would  be  for  the  parties  to  settle  the  transaction 
by  merely  paying  the  difference,  if  any,  between  the  prices 
at  which  the  two  transactions  were  made,  as  in  the  case  of 
the  real  estate  deal  mentioned  above. 

Ringing  Out 

The  principle  illustrated  above,  whereby  trades  are  can- 
celed hi  case  the  parties  place  themselves  in  their  original 
position  by  a  sale  back  to  the  original  seller,  is  customarily 
carried  much  further  upon  the  exchanges  than  elsewhere. 
For  instance,  Broker  A  may  sell  to  Broker  B  a  parcel  of 
wheat.  Broker  B  may  make  a  similar  sale  to  C ;  and  C  may 
sell  again  to  A.  It  is  seen  in  this  instance  that  a  complete 
ring  is  formed;  and  there  is  so  much  buying  and  selling  back 
and  forth  upon  the  exchanges  that  much  of  the  business 
will  resolve  itself  into  rings.  Many  of  the  rings  are  much 
larger  than  the  simple  one  suggested  above.  An  example  of 
such  a  large  ring  might  be  the  following :  — 

A  sells  5000  May  wheat  to  B 

B  C 

C  D 

D  E 

E  F 

F  G 

G  A 

It  will  be  noticed  in  this  large  ring,  as  well  as  in  the 
smaller  one,  that  the  purchaser  in  the  last  transaction  is  the 
seller  in  the  first;  so  that  deliveries  of  wheat  are  no  more 
necessary  than  in  the  previous  illustration.  It  is  the  busi- 
ness of  the  clerical  force  of  a  board  of  trade  house  to  watch 
the  various  future  transactions  and  settle  them  by  the  pay- 
ment of  differences  in  case  a  ring  be  formed,  such  settle- 
ments being  similar  in  principle  to  the  manner  in  which  any 


FEATURES  OF  ORGANIZED  SPECULATION      41 

conveyancer  would  adjust  a  real  estate  transaction  of  like 
nature. 

In  cases  of  a  ring  settlement,  the  manner  of  making  it  is 
more  complicated  than  where  a  purchaser  sells  back  pro- 
perty directly  to  the  one  who  sold  it  to  him.  Let  us  suppose 
a  case  hi  which  a  lot  of  5000  bushels  of  wheat  is  transferred 
between  the  following  parties  at  the  prices  mentioned:  — 

A  sells  to  B  at  81c 
B  C      79 

C  D      82 

D  E      78 

E  A      83 

One  way  of  settling  the  above  ring  would  be  for  B  to  pay 
to  A,  $4050,  the  value  of  5000  bushels  at  81c,  and  for  C  to 
pay  B  his  purchase  price,  or  $3950,  and  so  on.  But  it  is  not 
customary  for  business  men  to  pay  large  sums  of  money  to 
one  another  when  the  art  of  book-keeping  offers  an  easier 
way.  As  a  preliminary  to  understanding  the  method  by 
which  transactions  are  settled  upon  an  exchange  without 
the  transfer  of  large  sums  of  money  and  commodities,  the 
following  statement  of  profits  and  losses  per  bushel  hi  the 
last  supposed  ring  may  be  considered :  — 

Purchase  Selling 

Party  price  price  Profit  Loss 

A  83c  81c  2c 

B  81  79  2 

C  79  82  8c 

D  82  78  4 

E  78  88  5 

Total   8c  8c 

It  will  be  observed  that  the  total  losses  and  profits  in  this 
ring  are  exactly  equal,  as  was  to  be  expected,  and  it  is  only 
necessary  for  those  who  have  lost  to  pay  the  differences  to 
those  who  have  made  profits  in  order  that  the  ring  may  be 
settled.  For  convenience,  however,  the  book-keepers  have 
a  method  whereby  the  profits  and  losses  as  above  stated  are 


42          VALUE  OF  ORGANIZED  SPECULATION 

computed  to  a  certain  settling  price,  which  price  is  fixed  at 
such  a  figure  as  to  make  the  payments  of  money  as  small 
as  possible.  The  settling  price  is  used  merely  as  a  conven- 
ience, in  the  same  way  that  any  other  accounting  device 
available  in  any  particular  business  is  adopted  to  save  labor 
in  book-keeping.  In  the  description  of  the  ring  settlements 
as  well  as  of  other  exchange  practices,  it  is  not  meant  to 
imply  that  all  exchanges  use  precisely  the  same  methods, 
but  the  accounting  principles  availed  of  in  each  case  are  the 
same. 

It  should  be  stated  and  emphasized  at  this  point  that  no 
one  may  make  a  trade  upon  an  exchange  and  at  the  same 
time  declare  that  he  does  not  intend  to  deliver  the  grain  or 
other  commodity,  or  to  have  the  commodity  delivered  to 
him.  The  method  of  settlement  by  a  ring  and  settling  price 
is  intended  solely  for  cases  in  which  a  trader  has  concluded 
to  get  out  of  a  deal  before  the  time  for  delivery  arrives.  If 
he  wishes  to  make  the  actual  delivery  or  to  have  the 
delivery  made  to  him,  he  is  accommodated  in  every 
case. 

Another  important  example  may  be  brought  to  mind  of 
accounting  methods  similar  in  their  nature  to  the  ringing- 
out  process.  The  numerous  forms  of  acceptances,  bills  of 
exchange,  and  other  representatives  of  money  are  made  to 
do  the  duty  of  material  gold  and  to  economize,  to  an  enor- 
mous degree,  the  use  of  that  metal.  By  a  remarkable  sys- 
tem of  the  payment  of  differences,  the  adjustments  of  both 
domestic  and  international  trade  are  accurately  made  with 
astonishingly  small  shipments  of  actual  gold.  If  Paris  owes 
New  York,  and  New  York  owes  London,  and  London  owes 
Paris,  only  gold  enough  is  shipped  to  settle  the  differences 
in  the  transactions.  A  ring  has  been  formed  just  as  truly  as 
one  that  is  made  upon  the  board  of  trade;  and  commerce, 
by  its  refined  system  of  barter,  allows  paper  representa- 
tives and  promises  to  take  the  place  of  the  material  sub- 
stances in  terms  of  which  the  transactions  are  made. 


FEATURES  OF  ORGANIZED  SPECULATION      43 

Book  Accounts 

Among  the  lower  forms  of  savages,  it  would  perhaps  be 
impossible  to  understand  how  a  person  might  owe  another 
a  certain  sum,  and  have  due  him  a  certain  sum,  and  settle 
the  account  by  the  payment  of  the  balance  or  difference; 
but  it  is  a  concomitant  of  civilization  that  some  form  of 
book-keeping  or  accounting  makes  its  appearance  along 
with  the  other  characteristics.  As  civilization  progresses, 
we  find  that  the  system  of  accounting  becomes  more  and 
more  refined,  and  that  many  forms  of  transactions  are 
settled  by  adjusting  differences  on  paper.  A  business  man 
seldom  sees  gold  in  actual  circulation;  he  has  its  repre- 
sentatives, and  even  the  use  of  these  representatives  is 
economized. 

When  the  speculative  exchanges  use  the  methods  just 
referred  to  in  settling  business  transactions  by  depending  so 
largely  upon  offsets  made  in  books  of  account,  they  are  but 
utilizing  the  modern  method  of  doing  business;  and,  being 
the  highest  expression  of  the  competitive  system,  they  use 
book-keeping  in  place  of  more  cumbersome  methods  even 
more  frequently  than  is  done  in  other  forms  of  business.  In 
outside  business  the  amounts  placed  to  the  debit  or  credit 
of  the  different  parties  are  expressed  in  terms  of  money,  and 
the  quantity  of  commodities  as  such  is  not  usually  made 
the  subject  of  elaborate  book-keeping.  As  an  exception  the 
stock-book  might  be  mentioned,  in  which  the  attempt  is 
made  to  show  by  book-keeping  methods  the  stock  of  mer- 
chandise on  hand;  and  accountants,  in  some  business 
houses,  have  a  system  whereby  barrels,  burlaps,  or  other 
packages  or  coverings  are  accounted  for  in  cases  where 
they  are  not  directly  charged  to  a  party.  Similar  instances 
can  also  be  mentioned  in  various  lines  of  trade. 

Among  members  of  the  exchanges,  we  find  the  fullest  de- 
velopment of  the  system  of  keeping  accounts  of  merchan- 
dise. Listening  to  the  talk  of  a  grain  broker  and  his  clerks, 


44         VALUE  OF  ORGANIZED  SPECULATION 

one  will  sometimes  hear  the  "grain  balance"  referred  to  as 
of  equal  importance  with  the  cash  balance  or  the  bank  bal- 
ance. Upon  the  European  bourses,  as  previously  men- 
tioned, the  system  of  carrying  stocks  as  a  book  account  has 
been  more  highly  developed,  for  instance,  than  in  New 
York:  and  the  American  system,  which  in  this  particular 
is  not  progressive  in  taking  advantage  of  modern  account- 
ing methods,  has  been  criticized  as  not  affording  that  facil- 
ity of  movement  in  financial  matters  which  is  found  in 
European  systems,  and  as  fraught  with  greater  danger  of 
panics  and  squeezes.  But  leaving  aside  differences  in  the 
speculative  markets  and  the  customs  of  particular  ex- 
changes, it  is  seen  that  the  system  of  organized  specula- 
tion avails  itself  more  completely  of  modern  accounting 
methods  than  other  forms  of  business. 

In  settling  accounts  in  outside  business,  the  difference 
between  the  two  sides  of  the  ledger  is  called  a  "balance"; 
and  oftentimes,  by  the  payment  of  a  small  balance,  large 
items  on  both  sides  of  the  ledger  are  adjusted.  But  in  spec- 
ulation, as  when  a  commodity  is  bought  for  a  certain  figure 
and  sold  for  a  certain  figure,  the  balance  due  frequently  is 
called  a  "difference";  and  it  is  said  in  adjusting  the  ac- 
count that  "differences  are  settled."  The  word  difference 
is  again  called  to  mind  in  this  place  in  order  to  point  out 
that  its  technical  meaning  in  organized  speculation  is  much 
the  same  as  that  of  the  word  balance  as  ordinarily  used 
by  a  book-keeper  in  any  kind  of  business. 

The  Clearing-House 

After  considering  some  of  the  numerous  methods  by 
which  parties  are  substituted  and  accounts  are  canceled  in 
general  business,  we  come  to  the  clearing-house  as  the  place 
where  those  accounts  that  have  not  been  offset  or  balanced 
in  some  way  are  finally  adjusted.  Here,  it  seems,  is  the 
very  refinement  of  the  system  whereby  paper  representa- 
tives and  book  entries  are  made  to  take  the  place  of  actual 


FEATURES  OF  ORGANIZED  SPECULATION      45 

transfers.  Yet  here,  too,  we  find  that  the  organized  ex- 
changes carry  the  principle  farther  than  is  done  in  outside 
business.  In  his  ordinary  receipts  and  expenditures  the 
grain-  or  stock-broker  has  his  bank  account,  and  deposits 
and  draws  checks  as  does  everybody  else;  and  the  paper 
representatives  finally  pass  through  the  clearing  system  of 
banks  the  same  as  any  one's. 

But  in  the  speculative  transactions  made  upon  the  floor 
of  the  exchange,  it  is  found  that  the  ordinary  clearing  sys- 
tem does  not  carry  the  principle  far  enough,  and  many  ex- 
changes have  a  clearing-house  of  their  own,  for  the  express 
purpose  of  clearing  those  transactions.  The  principle  of 
clearing  is  carried  farther  in  such  a  clearing-house,  however, 
because  all  of  a  certain  class  of  transactions  are  at  once  put 
into  the  clearing-house  without  waiting  for  any  other 
method  of  settlement,  and  also  because  some  exchange 
clearing-houses  not  only  clear  money  items,  but  also  stocks 
and  commodities.  The  use  of  the  clearing-house  in  this 
connection  marks  the  culmination  of  the  manner  in  which 
the  various  forms  of  speculative  exchanges  supply  the 
freest  mobility  both  to  commodities  and  securities,  and 
represents  the  fullest  development  of  that  refined  system  of 
barter  so  characteristic  of  modern  commerce. 

A  Distinguishing  Feature 

Upon  the  speculative  exchanges,  as  has  just  been  shown, 
the  observer  finds  many  things  which  apparently  are  quite 
new  and  strange.  He  finds  traders  there  doing  things  which 
are  common  with  business  men  in  many  different  lines; 
but  he  finds  some  things  done  so  frequently  that  he  is  at  a 
loss  to  understand  the  process.  He  sees  the  actual  commo- 
dities on  every  hand  and  sees  deliveries  made.  He  notes, 
however,  that  in  a  great  many  transactions  there  are  no 
deliveries ;  and  he  finds  this  made  possible  by  a  system  of 
sales  for  future  delivery  whereby  it  becomes  the  easiest 
matter  for  the  trader  to  sell  goods  before  he  buys  them. 


46          VALUE  OF  ORGANIZED  SPECULATION 

The  illustrations  given  herein  are  intended,  not  only  to 
help  the.  reader  understand  the  system,  but  as  an  argument 
to  show  that  nothing  in  its  essence  different  from  what  is 
seen  outside  is  attempted  upon  the  exchanges.  When  specu- 
lation is  organized,  the  general  effect  is  the  same  as  that  of 
organization  in  any  line  —  effectiveness  is  increased.  By 
facilitating  the  process  and  making  it  rapid,  the  volume  of 
trading  is  greatly  augmented.  It  is,  indeed,  scarcely  be- 
lievable that  an  enormous  number  of  transactions  can  be 
made  in  a  particular  commodity  when  the  actual  amount  of 
it  in  existence  is,  comparatively  speaking,  so  small.  For  in- 
stance, it  is  not  considered  particularly  remarkable  that  a 
grain  exchange  should  trade  in  as  much  wheat  in  one  week 
as  the  actual  receipts  at  that  market  amount  to  for  a  whole 
year.  Thus  the  commodity  in  stock  is  bought  and  sold  over 
and  over  again;  or,  to  speak  more  accurately,  the  right  to 
possess  it  is  bought  and  sold  the  enormous  number  of  times 
referred  to.  Here  we  have  a  distinguishing  characteristic  of 
organized  speculation  —  the  great  number  of  transactions 
in  what  is  called  "wind."  So  great  is  the  number  of  trans- 
actions that  many  question  the  need  for  them;  but,  in  any 
case,  they  must  be  reckoned  with,  as  they  have  much  to  do 
with  the  peculiar  phenomena  observed. 

Speculators  classified 

The  instruments  which  the  speculator  uses  and  the  sys- 
tem under  which  he  works  are  not  the  only  things  which 
serve  to  show  the  identity  of  his  business  with  other  forms. 
Human  nature,  too,  the  personal  factor,  is  much  the  same 
in  the  pit  as  elsewhere.  But  certain  human  characteristics 
are  exaggerated  in  the  trading  room,  and  it  is  possible  there 
to  make  a  more  clearly  defined  classification  than  else- 
where. The  principle  of  classification,  however,  is  the  same. 
Here,  as  elsewhere,  are  to  be  found  the  people  who  know 
their  business  and  those  who  do  not  know  how  to  conduct 
wisely  their  own  affairs.  A  talent  for  speculation  is  one  of 


FEATURES  OF  ORGANIZED  SPECULATION      47 

the  rarest  gifts  a  man  may  have.  A  speculator,  like  a  poet, 
is  born,  not  made.  But  in  addition  to  the  peculiar  talent  for 
weighing  elements  of  value,  he  must  also  have  experience; 
and  those  persons  who  think  without  cause  that  they  pos- 
sess that  penetrating  vision  which  belongs  to  the  specu- 
lator also  think  that  they  can  speculate  without  experience. 
Hence  the  most  prominent  characteristic  of  the  unsuccess- 
ful speculator  is  his  amateurism. 

In  the  slang  of  the  street  these  amateur  speculators  are 
called  "lambs."  That  is  to  say  they  are  supposed  to  be 
persons  of  great  innocence;  and,  if  the  fact  of  losing  money 
is  a  proof  of  innocence,  then  it  must  be  admitted  that  they 
are  appropriately  named.  The  lambs  lose  their  money, 
which  fact  seems  to  be  a  surprise  to  many.  But  there  is 
nothing  to  cause  wonder  about  it.  It  is  the  same  misfortune 
which  overtakes  any  one  who  enters  any  business  that  he 
does  not  understand.  But  there  are  very  few  persons  who 
are  naturally  adapted  to  speculation  or  have  the  training 
necessary  to  engage  in  it;  and,  unfortunately,  it  is  a  fascin- 
ating business  and  appears  to  be  easy.  Hence  thousands  of 
persons  are  continually  rushing  into  it,  only  to  meet  the 
pitiful  fate  which  might  naturally  be  expected. 

Ranged  against  the  amateurs  or  lambs,  we  have  the  pro- 
fessional speculators.  They  occupy  the  same  vantage- 
ground  that  professionals  do  in  any  enterprise,  as  they 
know  what  they  are  going  to  do  and  why  they  do  it,  and 
have  provided  adequate  means  wherewith  it  may  be  ac- 
complished. One  way  in  which  these  professionals  make 
profit,  and  at  the  same  time  contribute  towards  the  steady- 
ing of  the  market,  is  by  keeping  money  in  readiness  to  make 
purchases  and  then  buying  during  a  panic  or  depression. 
Thus  these  seasoned  speculators,  as  a  result  of  their  know- 
ledge and  their  patience,  operate  with  profit  to  themselves 
and  for  the  good  of  the  commercial  world.  Henry  Clews 
refers  to  such  speculators  as  old  men  who  have  learned  by 
years  of  experience  that  the  time  to  buy  is  when  everything 


48         VALUE  OF  ORGANIZED  SPECULATION 

looks  most  discouraging.  The  following  is  his  picturesque 
account  of  them:  — 

"But  few  gain  sufficient  experience  in  Wall  Street  to 
command  success  until  they  reach  that  period  of  life  in 
which  they  have  one  foot  in  the  grave.  When  this  time 
comes,  these  old  veterans  of  the  Street  usually  spend  long 
intervals  of  repose  at  their  comfortable  homes,  and  in  times 
of  panic,  which  recur  sometimes  oftener  than  once  a  year, 
these  old  fellows  will  be  seen  in  Wall  Street,  hobbling  down 
on  their  canes  to  their  brokers'  offices. 

"Then  they  always  buy  good  stocks  to  the  extent  of  then- 
bank  balances,  which  have  been  permitted  to  accumulate 
for  just  such  an  emergency.  The  panic  usually  rages  until 
enough  of  these  cash  purchases  of  stock  is  made  to  afford  a 
big  'rake  in.'  When  the  panic  has  spent  its  force,  these  old 
fellows,  who  have  been  resting  judiciously  on  their  oars,  in 
expectation  of  the  inevitable  event,  which  usually  returns 
with  the  regularity  of  the  seasons,  quickly  realize,  deposit 
their  profits  with  their  bankers,  or  the  overplus  thereof, 
after  purchasing  more  real  estate  that  is  on  the  up  grade, 
for  permanent  investment,  and  retire  for  another  season  to 
the  quietude  of  their  splendid  homes  and  the  bosoms  of 
their  happy  families."  1 

Besides  the  retired  business  men  just  described,  there 
are,  of  course,  the  younger  men  at  present  taking  an  active 
part  in  financial  affairs,  who  also  have  money  on  hand  to 
make  investment  when  opportunity  offers.  These  men  are 
among  the  most  useful  factors  in  the  speculative  markets 
and  commerce  in  general,  as  their  business  operations  tend 
to  prevent  the  development  of  any  kind  of  commercial 
mania. 

Another  class  of  professional  speculators  is  composed  of 
those  who  "scalp"  the  market,  which  means  that  they 
trade  frequently,  and  endeavor  to  catch  the  smaller  move- 
ments, being  contented  with  a  profit  as  small  as  an  eighth 
1  Clews,  Fifty  Years  in  Wall  Street,  p.  14. 


FEATURES  OF  ORGANIZED  SPECULATION      49 

or  even,  as  upon  the  Chicago  Board  of  Trade,  a  sixteenth  of 
a  cent.  Scalping  is  by  no  means  peculiar  to  professional 
speculators,  as  the  lambs  are  usually  scalpers.  But  obvi- 
ously the  lambs  cannot  make  money  by  scalping,  as  they 
must  pay  commissions.  Commissions  on  the  exchanges, 
though  proportionately  very  small  when  compared  with 
other  commissions,  are  yet  large  when  compared  with  the 
very  small  profit  which  the  scalper  takes.  Thus,  if  he  makes 
a  gross  profit  of  half  a  point,  and  his  commissions  for  the 
round  turn  are  one  fourth  of  a  point,  his  expenses  are  fifty 
per  cent  of  his  gross  profit.  Few  businesses  can  be  profit- 
ably conducted  with  such  a  large  ratio  of  expense;  and  here 
we  have  one  of  the  reasons  why  the  accounts  of  the  lambs 
make  such  a  poor  showing. 

But  the  professional  scalper  is  a  member  of  the  exchange, 
does  his  own  trading,  and  pays  no  commissions.  He  is  on 
the  floor  or  in  the  pit,  sees  the  orders  come  in,  knows  the 
different  brokers  and  the  kind  of  customers  they  have,  and 
hence  is  able  to  make  some  estimate  at  first  hand  of  the 
character  of  the  buying  or  the  selling,  as  the  case  may  be. 
Some  of  these  professional  scalpers  succeed;  and  it  is  de- 
sirable that  there  should  be  scalpers  to  equalize  the  market 
and  prevent  it  from  responding  to  every  gust  and  eddy  of 
speculative  excitement  or  exaggerated  news. 

Besides  the  kinds  of  speculators  mentioned,  we  have  the 
professional  speculators,  of  which,  unfortunately,  there  are 
too  many,  who  depend  upon  fraud  of  one  kind  or  another 
to  make  the  market  go  where  they  wish  it.  This  class  of 
speculators  bears  the  same  relation  to  the  true  speculator 
that  the  quack  who  suppresses  the  symptoms  of  the  patient 
bears  to  the  scientific  physician  who  makes  an  honest  and 
correct  diagnosis  of  the  difficulty  to  be  remedied  and  brings 
the  patient  back  to  the  normal  condition  of  health.  The 
dishonest  manipulator  of  the  market  will  be  referred  to 
more  at  length  when  the  moral  aspects  of  speculation  are 
discussed. 


CHAPTER  II 

THE  EFFECT   UPON   PRICES 

As  a  result  of  the  conditions  described  in  the  last  chapter, 
we  find,  gathered  upon  the  exchanges,  forces  of  a  peculiar 
and  interesting  character.  The  contest  that  takes  place 
may  be  likened  to  a  battle;  and  yet  perhaps  popular 
opinion  is  partly  right  when  it  considers  speculative  trading 
in  the  similitude  of  a  slaughter,  or,  as  the  saying  is,  like 
"shearing  the  wool  of  the  lambs." 

A  flock  of  lambs  or  of  sheep  may  be  headed  for  the 
slaughter-house  or  shearing-pen.  They  may  be  in  charge  of 
a  competent  drover,  and  we  may  be  reasonably  certain  that 
they  will  eventually  be  deprived  of  their  wool,  and  perhaps 
of  their  lives.  Yet  these  helpless  creatures  have  wills  of 
their  own;  and,  by  their  persistently  erratic  conduct  in 
following  one  another  in  every  direction  seemingly  except 
the  right  one,  may  cause  their  keeper  the  greatest  trouble. 
He  will  round  them  up  finally,  but  in  the  process  they  may 
give  him  a  very  active  quarter  of  an  hour. 

A  person  who  is  not  a  zoophilist  may  enjoy  such  an 
unequal  contest;  and,  passing  to  the  business  world,  the 
trained  economist,  in  his  professional  enthusiasm,  may 
for  the  moment  almost  forget  that  business  operations 
require  the  continued  sacrifice  of  the  unfit,  and  that 
implicit  credulity  often  finds  the  unscrupulous  ready  to 
take  advantage.  Promising  later  to  return  to  the  humani- 
tarian and  ethical  aspects,  we  are  ready  to  regard  the  pro- 
blem from  the  psychological  and  material  side. 

Upon  the  floor  of  the  speculative  exchanges,  which  is  the 
theatre  of  the  struggle  at  present  under  consideration,  the 
amateurs  or  lambs  are  everywhere  in  evidence.  Like  the 


THE  EFFECT  UPON  PRICES  51 

dumb  brutes  after  which  they  are  named,  they  are  unable 
to  protect  themselves;  and  the  interest  which  centres  in 
their  movements  is  not  that  which  comes  from  a  fair  con- 
test. But  in  the  process  of  transferring  their  money  to  the 
pockets  of  the  professional  speculators,  important  effects 
upon  prices  are  observed;  and  it  will  be  necessary  to  ana- 
lyze the  process  in  order  to  account  for  these  effects. 

The  Minor  Fluctuations 

In  the  case  of  organized  speculation,  custom  is  of  little 
importance  in  fixing  a  price,  and  there  is  an  enormous 
number  of  orders  coming  upon  the  market.  The  arrange- 
ments are  such  that  any  item  of  news  is  at  once  telegraphed 
to  the  floor  of  the  exchange,  and,  by  a  news  ticker,  to  the 
various  brokers'  offices.  The  speculators  are  alert  and 
anxious.  Most  of  them  are  trading  upon  small  margins, 
and  the  broker  has  the  right  to  close  them  out  if  the  margin 
be  exhausted.  Under  the  above  described  circumstances, 
could  we  expect  any  other  result  than  that  the  market 
should  be  extremely  nervous  and  jerky?  No  other  markets 
except  those  that  are  the  subject  of  organized  speculation 
display  the  characteristics  just  mentioned. 

If  a  person  will  watch  the  quotations  as  they  come  in 
upon  the  tape,  he  will  frequently  note  the  most  astonishing 
performances.  He  will  see  wheat,  for  instance,  selling  at  a 
dollar.  A  minute  later,  he  may  be  informed  by  the  quota- 
tions coming  out  that  the  value  of  this  important  cereal  has 
changed  to  a  price  represented  by  99  cents.  But  scarcely 
has  the  observer  come  to  realize  this  fact,  when  he  finds  the 
quotations  rapidly  creeping  up  till  $1.01  is  reached. 

Astonished  at  these  movements  of  the  market,  he  may  go 
to  the  news  ticker  for  explanation.  There  he  may  find  any 
of  numerous  reasons  assigned.  It  may  be  said,  for  ex- 
ample, that  some  statesman  in  a  foreign  country  has  advo- 
cated raising  the  tariff  upon  wheat;  but  that,  on  the  result- 
ing decline,  good  supporting  orders  were  discovered  at  99, 


52          VALUE  OF  ORGANIZED  SPECULATION 

which  resulted  in  a  better  feeling  in  the  pit  and  hence  the 
rise.  A  variety  of  explanations  may  be  given;  but,  to  the 
discriminating  student,  it  would  appear  absurd  that  the 
value  of  the  wheat  should  be  really  affected  so  strongly  and 
so  frequently  by  the  comparatively  trifling  items  of  current 
news,  or  that  its  utility  as  an  article  of  use  was  changing 
with  each  of  these  many  minor  fluctuations. 

Yet  the  conditions  are  such  in  organized  markets  that 
every  circumstance  which  might  affect  values  causes  the 
greatest  amount  of  excitement.  The  news  is  coming  in  all 
the  time  over  the  tape.  There  are  many  traders  stand- 
ing about  with  little  to  do  except  to  talk;  and,  of  course, 
they  will  naturally  fan  any  rumor  that  may  start.  The 
speculators  are  greedy  and  impatient  and  want  their  or- 
ders executed  quickly.  Trades  must  be  made  immediately 
if  the  order  be  for  execution  at  the  market;  and  stop  orders 
and  other  resting  orders  described  in  the  last  chapter  fur- 
nish an  incalculable  element  which  sets  at  naught  some  of 
the  best  predictions  and  keeps  the  market  in  a  state  of 
feverish  activity. 

For  instance,  a  commodity  may  be  selling  at  90.  Senti- 
ment may  be  bearish,  and  a  decline  may  take  place  to  89f , 
but,  at  that  figure,  stop  loss  orders  are  uncovered,  and 
brokers  execute  them,  causing  further  uncertainties  and 
sales,  as  a  result  of  which  89j  is  reached.  At  that  figure, 
we  will  say,  there  are  waiting  orders  to  buy.  The  crowd  sees 
that  the  market  is  supported,  and,  in  the  buying  enthusi- 
asm that  ensues,  the  quotations  are  quickly  back  to  89f . 
But  here  selling  orders  are  found,  and,  the  sentiment  turn- 
ing bearish,  a  selling  fever  results  with  such  momentum 
that  the  market  is  quickly  down,  through  the  buying  orders 
at  89|,  till  at,  say  89,  fresh  stop  orders  are  found.  When 
these  are  disclosed,  their  execution  and  the  resulting  excite- 
ment and  terror  force  the  market  to  88f ,  from  which  point 
there  will  perhaps  be  another  rise,  and  so  on.  The  above  is 
but  an  illustration  of  the  manner  in  which  stop  orders  and 


THE  EFFECT  UPON  PRICES,       53 

other  waiting  orders  combine  with  the  ever-changing  news 
and  sentiment  in  tossing  the  market  about  in  a  multitude 
of  minor  fluctuations. 

The  fact  that  most  of  the  speculators  are  not  serious  stu- 
dents of  affairs  makes  their  orders,  whether  waiting  orders 
or  for  execution  at  the  market,  extremely  ill-judged  and 
eccentric.  The  idea  exists  among  the  rank  and  file  that 
the  insiders  absolutely  control  the  quotations,  and  that  the 
way  to  speculate  is  to  watch  the  indications  as  to  what  the 
prominent  traders  are  doing.  Thus  calculations  and  sta- 
tistics of  great  pith  and  moment  are  disregarded  in  the 
scramble  for  tips,  rumors,  and  surface  indications.  Hence 
the  traders  on  the  floor,  in  the  pit,  and  in  the  brokers'  of- 
fices are  continually  watching  in  order  to  follow  if  possible 
the  lucky  and  the  powerful,  and  to  do  the  opposite  of  what 
the  weak  and  unlucky  are  doing.  Consequently  the  most 
childish  rumors  are  able  to  influence  values;  and  such 
gossip,  as,  for  instance,  that  an  important  corporation 
officer  has  been  speaking  to  a  prominent  bull  or  bear,  is 
widely  circulated  and  is  considered  a  valuable  tip  and  a 
means  of  forecasting  prices. 

It  is  scarcely  necessary  to  enter  into  argument  to  prove 
that  fluctuations  effected  by  such  influences  are  not  legiti- 
mate, for  the  frequent  erratic  price  movements  could  not  be 
the  result  of  natural  commercial  conditions.  By  way  of 
contrast,  it  might  be  well  to  call  attention  to  the  market 
fluctuations  of  a  commodity  which,  owing  to  its  destructi- 
bility,  is  not  the  subject  of  organized  speculation.  Let  us 
consider  berries,  for  instance.  The  prices  of  such  fruit  pro- 
ducts vary  greatly  from  day  to  day,  and  there  may  be  im- 
portant fluctuations  during  the  day;  but  they  are  not  the 
subject  of  momentary  fluctuations. 

Another  consideration  which  tends  to  prove  the  fact  that 
these  momentary  fluctuations  are  not  legitimate  changes  in 
value  is  the  curb  market  of  the  Chicago  Board  of  Trade, 
which  constitutes  the  only  market  after  exchange  hours. 


54          VALUE  OF  ORGANIZED  SPECULATION 

There  are  sometimes,  of  course,  violent  fluctuations  back 
and  forth  upon  the  curb;  but  all  curb  trading  is  forbidden 
or  discouraged  by  the  rules  of  the  board.  Hence  there  is 
little  business  done;  and  the  curb  trading  remains  com- 
paratively stationary,  slightly  above  or  slightly  below  the 
closing  price,  till  the  next  morning  when  the  market  opens, 
frequently  showing  no  change  from  the  previous  day's 
close.  Thus  the  curb  in  Chicago,  being  relieved  of  the  enor- 
mous amount  of  trading  by  excited  speculators,  resembles 
those  markets  in  which  organized  speculation  does  not 
exist.  It  is  true  that  the  curb  is  in  a  sense  somewhat  organ- 
ized; for,  with  few  exceptions,  it  is  constituted  of  the  same 
brokers  who  have  been  trading  together  during  the  regular 
session  and  who  naturally  follow  the  usual  methods  of 
organized  speculation.  But  the  orders  given  for  execution 
on  the  curb  are  comparatively  few.  So  in  one  respect,  at 
least,  it  is  quite  different  from  a  thoroughly  organized 
market;  and,  as  might  be  expected,  we  seldom  find  the  mo- 
mentary fluctuations  observed  during  the  regular  session. 
To  sum  up:  organized  markets  are  subject  to  a  great 
number  of  momentary  changes  in  quotations,  caused  by  the 
manner  in  which  the  news  is  collected  and  distributed  to 
the  traders,  and  resulting  in  magnifying  many  items  which 
are  of  little  real  importance.  More  than  that,  the  great 
number  of  utterly  unskilled  speculators,  who  are  always 
watching  to  see  what  some  one  else  is  doing,  continually 
tend  to  further  the  erratic  and  choppy  minor  fluctuations. 

Extreme  Fluctuations 

The  prices  of  commodities  and  securities  have  different 
movements,  which  in  a  sense  are  independent  of  one  an- 
other. There  are  the  choppy  fluctuations  just  referred  to, 
and  there  are  the  wide  swings  of  price  movements  which 
usually  occupy  a  much  longer  space  of  time.  The  general 
effect  of  organized  speculation,  as  explained  above,  is  to 
increase  the  number  and  extent  of  the  minor  fluctuations; 


THE  EFFECT  UPON  PRICES  55 

but,  as  regards  the  large  swings,  it  has  the  opposite  effect 
and  tends  to  bring  the  limits  of  such  movements  together. 
The  distance  between  quotations  is  much  greater  where 
speculation  is  unorganized.  In  the  case  of  fruits,  prices  may 
vary  500  per  cent,  or  even  1000  per  cent,  between  successive 
sales.  So,  too,  in  the  case  of  real  estate;  its  value  is  not  con- 
tinually changing  with  minor  fluctuations,  but  there  may  be 
the  widest  price  movements  between  different  transactions 
in  a  particular  locality.  It  would  be  no  exaggeration  to  say 
that  a  piece  of  real  property  may  sell  at  $100  per  front  foot, 
while  the  next  transaction  in  equally  valuable  property  in 
the  same  locality  may  be  at  $50  per  front  foot,  or  the  differ- 
ence might  be  even  greater.  It  may  be  safely  claimed  that 
such  wide  discrepancies  in  successive  quotations  of  articles 
subject  to  organized  speculation  are  unknown. 

The  only  way  to  make  a  statistical  comparison  between 
a  market  in  which  speculation  is  organized  and  one  in  which 
such  organization  does  not  prevail,  is  to  consider  the  price 
record  of  a  commodity  both  before  and  after  organized 
speculation  has  been  introduced.  Such  statistics,  however, 
should  be  interpreted  with  great  care.  It  must  be  remem- 
bered that  speculation  is  not  the  only  influence  operative  in 
recent  years  which  has  a  tendency  to  bring  price  limits 
together.  The  whole  modern  method  of  doing  business, 
with  competition  and  organization  everywhere,  has  an  even 
greater  tendency  toward  the  same  result.  But,  on  the  other 
side,  there  are  strong  reasons  for  believing  that,  while 
organization  of  itself  tends  to  steady  prices,  the  greater 
attention  paid  in  recent  years  to  all  forms  of  commerce 
tends  to  increase  the  excitability  of  business  men  and  to 
counteract  the  quieting  effect  of  organization. 

In  Diagrams  I  and  II  are  shown  the  annual  range  of 
prices  of  wheat  and  corn  respectively  in  the  Chicago  market 
from  1865  to  1910.  In  Diagram  III  we  have  the  extreme 
fluctuations  of  cotton  each  year  from  1830  to  1909.  In 
each  diagram  the  differences  between  the  high  and  low 


56          VALUE  OF  ORGANIZED  SPECULATION 

prices  for  the  years  mentioned  are  represented  by  lines  of 
proportionate  length,  so  that  the  reader  can  readily  com- 


g      g 

oo  co 


1.60 

1.50 

1.40 

1.30 

1.20 

1.10 

1.00 

.90 

.80 

.70 

.60 

.50 

.40 

.30 

.20 

.10 


DIAGRAM  I 
YEARLY  RANGE  OF  WHEAT  PRICES  AT  CHICAGO  1865-1910 


.70 
.60 
.50 
.40 
.30 
.20 
.10 


DIAGRAM  II 
YEARLY  RANGE  OF  CORN  PRICES  AT  CHICAGO  1865-1910 


THE  EFFECT  UPON  PRICES 


57 


pare  the  range  of  fluctuations.  The  tables  upon  which  they 
are  based  appear  in  the  Appendix. 

It  will  be  noticed  at  the  start  that  there  is  great  irregu- 


42.00 


-10.7.5 


1830 
1835 
1840 
1845 
1850 
1855 
1860 
1865 
1870 
1875 
1880 
1885 
1890 
1895 
1900 
1905 


DIAGRAM  III 

YEARLY  RANGE  OF  COTTON  PRICES  AT  NEW  YORK  1830-1909 


58         VALUE  OF  ORGANIZED  SPECULATION 

larity  in  these  extreme  movements.  To  show  any  tendency, 
a  number  of  years  must  be  taken  into  consideration.  The 
Civil  War,  too,  widened  the  fluctuations  of  cotton,  so  that 
the  range  during  that  period  should  be  disregarded.1  But 
taking  note  especially  of  the  years  following  1870,  which 
all  observers  agree  was  about  the  date  at  which  the  future 
system  of  trading  became  fully  developed,  a  narrowing  of 
the  spread  will  be  noticed.  There  have  been  wide  ranges 
since  that  date,  and,  especially,  in  the  last  decade,  the 
spread  has  been  wide  in  the  fluctuations  of  the  cotton 
market.  But  since  1870,  some  tendency,  even  though  it  be 
a  slight  one,  toward  more  stable  markets  will  be  noticed. 
It  must  be  admitted,  however,  that  the  results  shown  are 
inconclusive,  and  that  allowance  must  be  made  before  any 
one  should  consider  them  of  much  weight  upon  either  side 
of  the  controversy.  They  are  introduced  principally  for  the 
purpose  of  showing  the  absurdity  of  the  statement,  so  fre- 
quently made,  that,  coming  in  with  the  introduction  of  the 
future  system,  we  have  had  a  great  increase  in  the  range  of 
fluctuations.  The  tables  and  diagrams  at  least  show  that 
such  statements  are  false.2 

Statistics  are  uncertain  in  this,  as  in  many  other  depart- 
ments of  economics,  and  it  is  rather  upon  a-priori  reasoning 
as  to  what  must  be  the  effect  of  particular  economic  deter- 
minants that  the  greatest  reliance  has  to  be  placed.  Unor- 
ganized speculation  and  speculative  business  may  go  to 
almost  any  extreme  before  a  halt  is  called  to  the  reckless- 
ness and  folly  of  traders.  In  the  case  of  organized  specula- 
tion, however,  there  is  an  important  check  upon  the  move- 
ment of  prices  and  upon  the  cumulative  effect  of  continued 

1  Among  the  many  results  on  commerce  of  the  Civil  War  and  the 
methods  adopted  for  financing  it  was  the  effect  of  the  inconvertible  paper 
currency  which  existed  between  1862  and  1878.  The  use  of  this  currency 
made  prices  higher  for  the  time,  and  was  one  of  the  causes  of  the  confusion 
and  uncertainty  in  business  transactions  which  resulted  in  the  wide  range 
referred  to. 

*  Cf.  Com'r  of  Corporations,  Report  on  Cotton  Exchanges,  passim. 


THE  EFFECT  UPON  PRICES  59 

buying.  The  machinery  is  so  arranged  that  the  opinion  of 
the  speculator  must  have  weight  at  the  particular  time  at 
which  he  acts.  In  other  words,  he  is  free  to  act  in  buying  or 
selling  whenever  he  is  ready.  But  the  fact  is  not  clearly 
shown  by  statistics  because  there  are  so  many  other  deter- 
minants which  enter  and  cause  confusion. 

A  Market  with  Two  Sides 

In  the  ordinary  flow  of  commodities  from  the  producer 
to  the  consumer,  there  are,  as  has  been  shown,  both  long 
purchases  and  short  sales.  Sometimes  the  business  man 
sells  what  he  has  already  produced  or  purchased;  and  at 
other  times  we  find  him  first  selling  what  he  does  not  own 
and  afterwards  producing  or  purchasing  in  order  to  make 
delivery.  But  speculation  of  any  kind  implies  that  the 
speculator  does  not  intend  to  consume  the  particular  com- 
modity he  trades  in.  His  service  to  society  is  of  a  different 
nature,  and  is  described  elsewhere  in  this  essay.  But  his 
trading  makes  a  greater  volume  of  purchases  and  sales, 
and  some  method  must  be  provided  for  making  and  settling 
these  numerous  transactions.  It  is  plain  that  the  stocks  of 
commodities  produced  for  actual  consumption  are  not  suf- 
ficient for  this  purpose,  and  hence  the  field  must  be  broad- 
ened by  the  use  of  paper  representatives. 

When  a  commodity  is  sold  for  cash  in  a  modern  commer- 
cial state,  the  transaction  is  usually  different  from  a  similar 
transaction  in  a  primitive  society.  A  host  of  writers  have 
pointed  out  that  this  cash  does  not  necessarily  mean  actual 
gold,  and  they  have  well  shown,  that  in  modern  times  the 
financial  side  of  a  sale  may  be  accomplished  by  the  use  of 
one  or  more  of  the  representatives  of  gold  which  banking 
and  monetary  science  have  evolved.  But  our  economic 
writers  have  not  been  as  careful  to  emphasize  the  fact  that 
commodities  other  than  gold  may  have  paper  representa- 
tives, and  that  a  promise  to  deliver  commodities  may  have 
just  as  natural  a  use  in  business  as  a  promise  to  pay  money. 


60         VALUE  OF  ORGANIZED  SPECULATION 

A  promissory  note  may  be  made  by  a  party  who  has  not 
the  money  to  pay  the  note.  It  may  be  discounted  at  a  bank; 
and  when  it  is  settled,  the  "payment "  may  not  be  in  money 
at  all;  but  the  amount  of  the  note  may  merely  form  one 
item  of  the  page  of  a  ledger  at  a  time  when  numerous  trans- 
actions of  a  similar  nature  are  settled  by  book  entry.  The 
use  of  this  paper  representative  of  money  with  a  short  sale 
of  gold  is  necessary  in  the  routine  of  systematized  finance. 
But  if  there  is  to  be  perfect  freedom  of  trade,  there  must  be 
equal  facility  in  using  paper  representatives  on  the  com- 
modity side  of  a  transaction;  and  hence  the  use  which  is 
made  of  promises  to  deliver  commodities.  There  cannot  be 
freedom  in  finance  unless  a  business  man  has  the  right  to 
accept  the  promise  of  another  to  pay  money  and  to  nego- 
tiate the  same;  and  there  cannot  be  freedom  in  commerce 
unless  a  business  man  is  allowed  to  make  or  accept  pro- 
mises to  deliver  commodities  and  trade  in  them. 

In  the  same  sense  that  the  bank  is  the  highest  evolution 
and  development  of  the  monetary  system,  so  the  exchange 
is  the  highest  evolution  and  development  of  the  trade  in 
commodities  and  securities;  and  in  the  same  way  that  a 
bank  makes  especial  use  of  promises  to  pay  money  and 
needs  special  facilities  in  order  to  make  the  best  use  of  these 
refinements  of  finance,  so  the  exchange  needs  to  be  fully 
equipped,  to  have  full  power,  and  to  provide  special  facili- 
ties for  trading  in  promises  to  deliver  commodities  and 
securities.  Hence  it  is  that,  though  short  selling  is  seen 
everywhere  hi  commerce,  it  is  the  business  of  the  exchanges 
to  provide  facilities  for  it  in  speculation,  and  to  make  those 
facilities  so  perfect  that  operations  for  a  decline  may  be  as 
easily  entered  into  as  those  for  an  advance.  When  this  is 
accomplished,  we  have,  as  a  result,  a  market  with  two  sides. 

In  order  to  bring  out  clearly  the  difference,  let  us  con- 
sider first  a  speculative  boom  in  a  market  where  short 
selling  has  not  been  especially  provided  for.  The  specu- 
lators pile  purchase  on  purchase,  and  the  price  of  the  com- 


THE  EFFECT  UPON  PRICES  61 

modity  mounts  higher  and  higher,  it  seeming,  indeed,  that 
no  top  will  ever  be  reached.  But  this  seeming  is  not  real- 
ized; there  is  a  limit  to  the  folly  of  man,  even  when  dis- 
played in  a  speculative  boom.  A  few  of  the  more  cautious 
will  begin  to  liquidate;  and,  if  the  time  be  ripe  for  it,  a 
selling  movement  will  so  quickly  develop  that  it  seems 
almost  instantaneous.  For  a  bull,  when  filled  with  terror, 
may  be  a  more  persistent  and  demoralizing  seller  than  a 
bear. 

As  a  result  of  the  tendencies  just  described,  we  find,  in 
the  case  of  unorganized  speculation,  that  the  boom  itself 
goes  farther,  because  there  is  no  one  to  check  it,  since  the 
cool  heads  have  no  effective  way  of  making  their  opinions 
felt  on  the  market.  But  when  at  last  the  bulls  themselves 
take  flight,  we  have  a  condition  in  which  prices  will  decline 
to  a  point  even  lower  than  that  at  which  the  boom  started. 
By  compelling  all  speculators  to  be  bulls,  we  do  not  prevent 
declines.  On  the  contrary,  a  market  in  which  there  are  no 
facilities  for  the  bear  to  act  is  one  in  which  the  declines  are 
most  sudden  and  terrible. 

Turning  from  the  unorganized  markets,  let  us  consider 
those  in  which  the  speculation  is  organized,  and  in  which 
an  operator,  who  believes  that  prices  are  mounting  too 
high,  may  have  weight  in  the  market  by  selling  for  future 
delivery.  In  such  a  market  a  trader  may  be  either  a  bull  or 
a  bear;  that  is  to  say,  he  may  either  buy  before  he  sells,  or 
he  may  sell  before  he  buys.  Hence  the  bear,  when  he  sees 
reckless  buying  and  abnormal  advances  in  price,  may 
apply  the  brake  by  selling.  He  may  do  this  even  though  he 
have  none  of  the  property  on  hand;  for,  through  the  facili- 
ties provided,  he  may  express  his  opinion  on  the  market, 
and  have  that  opinion  made  effective,  without  having  pre- 
viously qualified  himself  by  making  purchases.  His  selling 
will  often  bring  a  runaway  market  to  a  halt  and  give  time 
for  reflection.  Its  effect  upon  the  market  varies  according 
to  its  amount  and  according  to  the  psychological  state  of 


62          VALUE  OF  ORGANIZED  SPECULATION 

all  concerned;  but  it  will  usually  be  sufficient  to  cut  short 
the  worst  effects  of  bullish  excitement.  The  market  is  thus 
turned  downward  at  a  much  earlier  point  than  if  the  more 
sanguine  bulls  were  allowed  to  fan  the  flame  of  speculation 
to  the  greatest  extent  possible. 

After  the  bears  have  thus  demonstrated  their  power  to 
affect  the  market,  and  even  for  a  time  to  gain  the  mastery, 
the  enthusiasm  of  the  bulls  is  perceptibly  cooled,  and  some 
of  the  more  sensible  of  them  close  out  their  longs;  others 
following,  prices  sag,  and  a  bear  market  is  the  result. 

It  has  been  shown  above  how  many  of  the  excesses  of  a 
bull  market  are  saved  by  the  action  of  the  bears  who  sell 
for  future  delivery  that  which  they  do  not  own.  It  will 
further  be  called  to  mind  that  it  was  the  bears  who  first 
threw  cold  water  upon  the  speculative  bullish  enthusiasm; 
but  that,  after  the  market  had  been  brought  to  a  halt  and 
the  bulls  had  time  to  come  to  their  senses,  their  liquidation 
had  helped  to  turn  the  market  from  bullishness  to  bearish- 
ness.  In  the  same  way,  where  there  is  organized  specula- 
tion, the  bulls  are  equally  free  to  initiate  a  movement;  and 
when  the  bear  market  appears  to  be  going  to  excesses,  they 
are  ready  to  buy  and  so  reverse  conditions.  Thus  the  pes- 
simism that  was  running  to  excess  is  cut  short  and  the 
market  turned  upward. 

But  bears  are  like  bulls  in  their  temperament  and  their 
human  nature.  It  requires  but  a  hint  to  show  the  more 
sensible  of  them  the  folly  of  over-staying  their  market.  As 
soon  as  their  shorts  show  a  good  profit  and  good  buying 
appears,  they  begin  covering;  and  their  demand  assists 
generally  in  bringing  to  a  close  the  excesses  of  a  bear  mar- 
ket. In  the  midst  of  a  panic,  when  the  bulls  are  but  just 
beginning  to  gain  confidence  from  the  few  scattering  pur- 
chases of  the  more  courageous  of  their  number,  the  bears 
may  act  without  fear.  Their  purchases  at  such  a  time  are 
but  to  secure  their  profits;  and  they  may  buy  with  more 
confidence  and  telling  effect  than  the  disheartened  bulls, 


THE  EFFECT  UPON  PRICES  63 

who  need  great  courage  in  order  thus  to  enter  into  new 
commitments. 

It  is  not  intended  here  to  convey  the  idea  that  the  bull  or 
bear  party  must  each  act  together  in  the  particular  manner 
suggested.  On  the  contrary,  every  trader  is  an  individual, 
and  the  trades  of  bulls  and  bears  dovetail  into  one  another 
in  the  most  complicated  manner.  In  the  last  few  para- 
graphs it  was  intended  merely  to  discuss  the  probabilities 
as  to  which  party  is  likely  to  have  the  preponderating  influ- 
ence at  the  different  periods  of  a  market  movement.  After 
a  decline,  when  there  is  too  much  of  a  tendency  to  pessim- 
ism, the  sanguine  bull  is  necessary  to  pierce  the  clouds  of 
gloom  that  obscure  the  sentiment  of  traders;  but  after  an 
excited  advance,  when  all  the  circumstances  appear  so 
hopeful,  the  cynical  and  careful  bear  needs  the  facility  for 
expressing  his  opinion  upon  the  market  by  a  short  sale.  He 
needs  this  opportunity  as  much  as  the  bull  needs  the  privi- 
lege of  making  a  long  purchase. 

As  for  the  liquidation  of  the  bulls,  such  sales  help  to  turn 
a  bull  market  into  a  bear  market;  but  the  change  of  senti- 
ment is  effected  quicker  if  the  bear  has  the  opportunity  to 
assist  by  his  short  sales  in  the  selling  movement.  In  the 
same  way,  the  covering  of  shorts  in  a  bear  market  assists  a 
rise;  but  the  initiative  usually  comes  through  the  long 
purchases  of  the  bulls. 

Summing  up;  it  may  be  said  that  in  any  case,  whether 
the  market  be  organized  or  unorganized,  there  is  a  limit  to 
an  advance  or  decline.  There  is  always  a  point  at  which 
timid  bulls  will  begin  selling,  even  though  there  be  no 
organization  in  the  speculation.  There  is  always  a  point  at 
which  demand  will  spring  up,  even  though  a  decline  may 
be  of  the  demoralizing  character  of  unorganized  specula- 
tion. But  in  case  speculation  be  not  organized,  advances 
and  declines  go  to  extreme  limits,  because  bears  in  a  one- 
sided market  have  no  way  of  making  their  opinions  effect- 
ive, either  in  initiating  a  bear  deal  or  in  closing  the  same. 


64         VALUE  OF  ORGANIZED  SPECULATION 

Organized  speculation,  however,  permits  this  conservative 
action  of  the  bear.  It  helps  to  cut  short  the  boom  by  per- 
mitting short  sales,  and  helps  to  bring  to  a  stop  the  ensuing 
decline  when  the  short  contracts  are  covered.  Thus  it  is 
that  the  balance  is  preserved;  and  the  history  of  a  bull 
market  is  the  same  as  that  of  a  bear  market,  with  the 
parties  and  tendencies  reversed. 

The  Excitability  of  Speculators 

Such  is  the  ideal  effect  of  the  two-sided  market  furnished 
by  organized  speculation.  Yet  there  are  always  counter- 
acting influences;  and,  in  the  subject  under  discussion,  the 
excitability  of  speculators  brought  about  by  close  associa- 
tion and  organization  should  be  mentioned. 

Almost  all  speculators,  though  they  ought  to  know  the 
danger  of  their  calling,  are  nevertheless  reckless.  This  is 
true  in  the  case  of  unorganized  speculation  as  well  as  in  that 
of  the  organized  kind.  It  is  scarcely  necessary  to  do  more 
than  refer  to  recent  land  booms  in  different  parts  of  the 
country  to  substantiate  this  position.  Nevertheless,  it 
must  be  admitted  that  organization,  which  makes  it  so 
easy  to  speculate,  gives  opportunity  for  the  speculator  to 
act  more  quickly  than  he  could  in  the  absence  of  the  special 
facilities  provided.  Hence  the  speculative  exchanges,  being 
organized  for  the  purpose  of  furthering  speculation,  nat- 
urally fan  the  speculative  fever  and  render  it  possible  to 
urge  men  on  in  masses  to  do  reckless  things  that  they  would 
in  some  cases  shrink  from  if  acting  singly. 

The  result  is  that  the  steadying  effect  of  a  two-sided 
market  is  to  some  extent  neutralized.  By  the  use  of  an 
effective  system  of  news  dissemination,  market  letters, 
and  false  rumors,  the  leaders  of  the  market  too  often  suc- 
ceed in  hypnotising  their  poor  dupes,  the  amateur  specula- 
tors. The  insane  boom  of  bullish  enthusiasm  may  be 
counteracted  by  short  sales;  and  yet  the  few  cool  heads, 
although  possessed  of  millions  of  money,  may  not  be  able  to 


THE  EFFECT  UPON  PRICES  65 

cut  short  the  boom  till  the  infatuated  bulls  have  so  com- 
mitted themselves  that  the  decline  or  reaction  in  prices  will 
surely  ruin  them.  And  a  bear  market  will  sometimes,  though 
not  so  often,  run  to  a  ruinous  extreme. 

A  Summary 

In  the  speculative  market,  as  in  all  markets,  there  are 
cycles  within  cycles  in  which  there  is  action  and  reaction 
in  the  greatest  complexity;  and  the  tendencies  described 
are  not  always  apparent,  although  each  must  have  its 
effect  in  determining  the  prices  that  issue.  At  this  point  it 
may  be  convenient  to  sum  up  the  tendencies  that  have  been 
described  thus  far. 

The  great  mass  of  amateur  speculators,  whose  deals  con- 
stitute the  bulk  of  speculative  transactions,  render  an  ex- 
change market  extremely  erratic  and  fluctuating.  The  fluc- 
tuations so  caused  reflect  simply  their  inexperience  and  want 
of  discretion.  Like  the  amateurs  in  any  line,  they  serve 
to  hinder  the  professionals  from  properly  doing  their  work. 

As  regards  the  long  swings  of  the  market,  the  amateurs  do 
not  have  so  great  an  effect;  and  the  operations  of  the  pro- 
fessionals, under  the  conditions  prevailing  in  organized 
markets,  have  a  strong  tendency  to  narrow  the  range  of 
fluctuations  which  the  excitable  nature  of  the  speculators 
would  otherwise  further.  In  the  early  stages  of  a  boom,  the 
short  seller  cuts  off  what  might  have  developed  into  great 
speculative  excitement;  and  later,  when  a  decline  has 
resulted,  he  assists  in  stopping  it  by  his  purchases  to  cover. 
Thus  short  selling  —  that  essential  characteristic  of  organ- 
ized speculation  —  has  an  important  tendency  to  curtail 
the  extremes  to  which  excitement  and  over-trading  would 
otherwise  lead. 

Depressing  Prices 

But  beyond  the  speculative  influences  already  men- 
tioned, there  are  others  which  may  give  a  market  either  a 


66         VALUE  OF  ORGANIZED  SPECULATION 

bearish  or  bullish  trend.  Such  a  tendency  may  be  caused 
by  organized  speculation,  and  may  be  an  ever-present 
factor.  Yet,  notwithstanding  the  different  opinions  of 
some  others,  the  writer  takes  the  position  that  any  such 
untoward  tendency  toward  bullishness  or  bearishness  in 
average  prices,  caused  by  speculators,  is  strictly  limited  in 
its  field.  Thus  the  price  of  wheat  in  this  country  cannot  be 
kept  at  such  a  high  figure  that  the  surplus  will  not  be  ex- 
ported at  any  time  during  the  crop  year.  In  the  same  way, 
it  cannot  be  kept  at  such  a  low  figure  that  farmers  will  not 
produce  it.  Or  stocks  and  securities  cannot  be  kept  at  such 
high  figures  that  other  investments  will  absorb  all  the  cap- 
ital offering.  Nor  can  they  be  kept  at  such  low  figures  that 
every  one  having  funds  to  invest  would  put  them  all  into 
securities  listed  upon  the  speculative  exchanges.  But  it  is 
possible  for  speculation  to  cause  price  levels,  which,  for  a 
considerable  period  of  time,  are  different  from  those  which 
would  otherwise  prevail. 

The  limitations  above  stated,  however,  are  not  generally 
admitted;  and  the  opinion  is  usual  among  the  rank  and  file 
of  speculators  that  the  leaders  of  the  market  can  put  prices 
exactly  where  they  wish.  Among  outsiders  the  opinion  is 
that  the  movements  of  the  market  attributable  to  ex- 
change trading  can  overcome  all  other  price  tendencies; 
and,  particularly,  that  they  can  depress  prices  to  an  in- 
definite extent. 

This  idea  comes  of  excellent  parentage,  for  it  is  advo- 
cated by  the  farmer.  The  producer  of  agricultural  com- 
modities, it  is  argued,  must  be  a  practical  man.  He  knows 
what  soil  and  climatic  conditions  are  needed  to  grow  crops, 
and  he  has  devoted  himself  so  faithfully  to  their  culture 
that  he  understands  the  commercial  processes  which  ensue 
after  the  commodity  leaves  his  hands.  He  knows,  for  in- 
stance, how  difficult  it  is  to  grow  wheat.  Yet,  upon  the 
Board  of  Trade,  speculators  may  agree  to  deliver  agricul- 
tural commodities  in  the  future,  and  contracts  to  deliver 


THE  EFFECT  UPON  PRICES  67 

are  accepted  in  the  general  course  of  trade.  It  is  natural, 
then,  for  the  farmer  to  argue  that  it  is  easier  to  produce  in 
this  way  something  that  will  satisfy  the  demand  for  his 
crops  than  by  the  old  process  of  sowing  and  reaping;  hence 
he  sees  in  the  speculative  seller  a  most  dangerous  compe- 
titor. 

To  him  who  believes  in  the  specialization  of  functions,  it 
would  appear  that  the  farmer  knows  on  the  average  about 
as  much  in  regard  to  the  grain  trade  as  the  Chicago  Board 
of  Trade  man  knows  about  farming.  But  inasmuch  as 
many  persons  believe  in  the  kind  of  reasoning  just  referred 
to,  and  sweeping  and  drastic  laws  are  frequently  proposed, 
and  sometimes  enacted,  in  pursuance  thereof,  it  will  be 
necessary  to  give  the  arguments  so  arrived  at  detailed 
attention. 

The  Demand  and  Supply 

It  will  not  be  questioned  that  the  prices  of  commodities 
and  securities  are  governed  by  demand  and  supply  as  inter- 
preted and  explained  in  the  writings  of  the  leading  econ- 
omists. But,  in  order  to  understand  dealing  upon  a  specu- 
lative exchange,  it  is  necessary  to  have  as  clear  an  idea  as 
possible  in  regard  to  what  it  is  that  parties  are  trading  in 
when  contracts  are  entered  into  for  future  delivery.  As  an 
instance  let  us  consider  wheat  sold  for  July  delivery.  When 
the  month  of  July  arrives,  the  warehouse  receipts  may  be 
delivered  on  the  contract  and  the  trading  in  it  at  that  time  is 
much  the  same  as  dealing  in  the  actual  commodity. 

But  when  we  are  trading  in  July  wheat  before  the  time 
for  delivery,  it  would  appear  that  the  resemblance  of  the 
future  to  spot  wheat  is  not  so  close.  If  we  go  by  the  letter 
of  the  contract,  no  deliveries  of  wheat  may  be  made  until 
the  month  of  July;  and  in  the  period  before  July  1,  the 
thing  that  is  in  the  minds  of  the  traders,  the  thing  that 
passes  through  the  clearing-house,  and,  consequently,  the 
thing  that  is  actually  dealt  in,  is  contracts  —  not  actual 


68          VALUE  OF  ORGANIZED  SPECULATION 

wheat.  In  the  subjective  estimate  of  the  value  of  these  con- 
tracts made  by  the  traders  they  naturally  consider  the  like- 
lihood of  large  or  small  supplies  of  actual  wheat  in  the 
future.  But  the  direct  cause  of  the  value  which  they 
assign  to  them  is  their  estimate  of  the  demand  and  supply 
of  contracts. 

For  these  contracts  may  have  elements  of  value  which 
are  not  directly  dependent  upon  the  use  to  which  the  actual 
wheat  can  be  put.  This  is  readily  seen  in  the  case  of  a 
squeeze  or  corner.  When  the  rumor  is  heard,  for  example, 
that  strong  parties  are  getting  control  of  the  July  option, 
the  shorts  naturally  become  apprehensive  and  begin  to  feel 
some  doubts  as  to  their  ability  to  deliver  the  wheat  when 
the  month  for  delivery  comes.  They  bid  for  July  contracts, 
therefore;  not  necessarily  because  they  think  that  wheat 
will  be  higher  next  July,  but,  it  may  be,  because  they  know 
that  a  purchase  of  a  July  contract  will  free  them  from  the 
obligation  entered  into  by  the  sale  of  such  a  contract. 

A  trader  may  be  of  the  opinion  that  actual  wheat  will  be 
lower  next  July,  and  he  may  therefore  feel  assurance  that, 
if  he  keeps  his  short  contract  good,  he  can  cover  at  a  profit 
when  that  month  arrives ;  but  he  may  be  afraid  that  wheat 
will,  in  the  interval  after  the  time  of  making  the  deal,  say 
March,  be  manipulated  upward,  and  his  margin  found  in- 
sufficient. Thus  the  July  contract  may  have  a  value  to  him 
in  the  interval  independent  of  the  value  of  the  actual  wheat 
when  it  is  delivered. 

The  doctrine  here  advanced  in  regard  to  grain  contracts 
having  a  value  in  some  respects  independent  of  that  of  the 
actual  commodity  called  for  is  no  different  in  principle 
from  the  doctrine  generally  held  in  regard  to  other  con- 
tracts. Let  us  consider  a  railroad  bond,  for  instance.  In 
its  ultimate  analysis  such  a  contract  is  one  to  deliver  a  cer- 
tain amount  of  gold  officially  stamped  and  certified  by  the 
Government;  and  an  important  change  in  the  value  of  gold 
would  of  course  have  its  effect  upon  the  value  of  the  con- 


THE  EFFECT  UPON  PRICES  69 

tract.  If  an  intending  investor,  however,  should  seek  in- 
formation from  an  expert  in  regard  to  the  value  of  a  parti- 
cular bond,  the  arguments  brought  forward  would  have 
little  to  do  with  the  value  of  gold,  but  would  be  principally 
concerned  with  such  questions  as  the  loaning  rate  for 
money,  the  time  of  maturity  of  the  bond,  or  the  ability  and 
honesty  of  the  parties  managing  the  property  —  questions 
quite  aside  from  the  value  of  the  gold  that  the  bond  in  its 
ultimate  analysis  calls  for. 

When  the  title  to  a  bond  changes  hands,  one  party  simply 
steps  into  the  shoes  of  another,  the  purchaser  having  the 
rights  of  the  previous  owner  in  enforcing  the  contract.  It  is 
the  same  with  any  contract,  as,  for  instance,  one  to  deliver  a 
house,  a  boat,  or  a  quantity  of  grain  or  pork.  If  one  party 
be  substituted  for  another,  it  is  really  the  contract  with  its 
rights  and  obligations  that  changes  hands  and  not  the  thing 
which  would  be  called  for  by  its  literal  enforcement. 

The  reason  why  this  fact  is  not  generally  recognized  is 
probably  because  a  bond  is  formally  printed  and  signed  and 
passed  from  hand  to  hand  when  sold,  and  is  seldom  settled 
by  the  payment  of  actual  gold.  But  a  contract  to  deliver 
wheat  upon  an  exchange  is  not  usually  shown  to  its  pur- 
chaser; and  more  frequently  than  in  the  case  of  a  bond,  it  is 
settled  by  the  actual  delivery  of  the  commodity  called  for. 
It  is  true,  however,  that  any  special  value  which  a  contract 
may  have  over  and  above  the  value  of  the  commodity  to  be 
delivered  is  more  frequently  referable  to  speculation  or 
manipulation,  if  the  contract  be  to  deliver  wheat,  than  in 
the  case  of  a  bond;  and  the  condition  of  the  market  brought 
about  by  the  so-called  artificial  factors  just  mentioned  is 
usually  referred  to  as  its  technical  position. 

But  whether  artificial  or  not,  technical  conditions  should 
not  be  ignored;  and  those  writers,  who  argue  that  the 
market  can  be  depressed  by  the  offer  for  sale  of  wheat  con- 
tracts, have  a  large  measure  of  truth  in  their  favor.  In 
market  estimates  by  traders,  the  technical  position  is  con- 


70         VALUE  OF  ORGANIZED  SPECULATION 

sidered  highly  important.  In  newspaper  reviews,  also,  the 
nervousness  of  the  shorts  and  the  oversold  or  overbought 
condition  of  the  markets  are  frequently  referred  to. 

If  it  were  not  true  that  technical  market  conditions 
affected  the  prices  of  a  commodity  or  security,  then  there 
could  be  no  such  thing  as  manipulation  of  the  market  for 
futures  by  offerings  to  buy  or  sell.  The  importance  of  de- 
mand and  supply  for  contracts  is  further  seen  in  the  fact 
that  some  traders  successfully  scalp  the  market  who  pay 
no  attention  to  the  influences  affecting  the  supply  and 
demand  of  the  actual  commodity  or  security.  They  are 
traders  of  great  quickness,  who  understand  human  nature 
and  know  the  people  associated  with  them  and  the  condi- 
tions prevailing  in  the  pit  or  on  the  floor. 

When  it  is  further  remembered  that  the  great  unwieldy 
mass  of  contracts  owned  by  amateur  speculators  are 
weakly  held,  that  margins  are  being  exhausted  and  con- 
tracts thrown  upon  the  market  for  that  reason,  that  a  cover- 
ing movement  caused  by  apprehension  of  shorts  is  of  almost 
daily  occurrence,  and  that  there  are  a  great  number  of 
traders  whose  principal  use  of  a  contract  is  as  a  counter  in 
the  game  of  speculation,  it  is  seen  that  a  contract  has  a 
value  of  its  own  which  may  be  greater  or  less  than  the 
future  value  of  the  commodity  which  it  calls  for  at  the  time 
of  its  delivery.  After  making  all  due  allowances,  therefore, 
one  of  the  most  important  things  to  take  note  of  is  the  de- 
mand and  supply  of  contracts,  considered  principally  from 
the  standpoint  of  their  use  in  canceling  trades  in  the  specu- 
lative markets. 

It  is  the  mistake  of  the  anti-optionists,  that,  while  they 
can  see  this  supply  of  "wind"  or  "paper"  wheat  or  other 
commodity  which  is  manufactured  upon  the  board  of 
trade,  they  cannot  see  the  demand  for  it.  Yet  the  demand 
for  "paper"  wheat  is  more  important  than  the  supply  of 
the  same,  because  the  average  speculator  has  a  prejudice 
for  the  buying  side,  and  is  continually  giving  his  broker 


THE  EFFECT  UPON  PRICES  71 

orders  to  bid  for  the  futures  whenever  he  thinks  that  there 
is  any  possibility  of  a  rise  in  price.  The  prejudice  of  the 
rank  and  file  of  speculators  for  the  bull  side  is  so  thoroughly 
understood,  and  has  been  so  widely  commented  upon,  that 
it  does  not  need  to  be  further  emphasized. 

The  professional  operators  are  smart  enough  to  see  the 
advantage  of  utilizing  this  prejudice;  for  the  psychological 
element,  so  important  in  all  price-making,  is  by  no  means 
neglected  by  the  great  leaders  of  the  market.  They  have 
under  their  observation  the  supply  of  contracts,  the 
"wind"  wheat  which  is  manufactured  principally  to  specu- 
late with,  a  supply  which  cannot  be  used  to  meet  the  needs 
of  millers  or  exporters  till  delivery  time  arrives.  But 
against  the  supply,  they  note  an  even  greater  demand  for 
this  same  "paper"  wheat  from  traders  who  wish  it  purely 
for  speculative  purposes.  What,  then,  is  the  result?  The 
demand  for  "wind"  wheat  is  greater  than  the  supply  of  the 
same;  and  it  is  readily  seen  why  it  is  that  the  market  for 
futures  always  has  a  tendency  to  rise,  even  on  the  slightest 
provocation,  and  why  manipulators  so  often  are  found  tak- 
ing advantage  of  this  tendency  by  working  the  market 
upwards. 

The  Temper  of  the  Speculators 

Since  the  demand  and  supply  of  contracts  are  so  im- 
portant in  determining  price,  we  are  led  to  consider  the 
state  of  mind  of  the  traders  in  contracts,  and  the  peculiar 
nature  of  the  contract  itself  as  affecting  their  psychological 
condition.  The  important  points  to  be  thus  considered  are 
that  the  majority  of  traders  are  naturally  bullish,  and  that 
the  terms  of  a  short  contract  are  such  that  the  bears  are 
always  apprehensive  lest  they  be  driven  into  some  kind  of 
a  squeeze  or  corner. 

The  market  manipulator  must  manage  his  crowd  of 
reckless,  rash,  eccentric  traders  by  conforming  to  their 
prejudices  and  taking  advantage  of  their  weaknesses.  He 


72          VALUE  OF  ORGANIZED  SPECULATION 

must  conform  to  their  prejudices  by  being  especially  sure 
of  his  ground  if  he  opposes  them.  The  time  when  they 
become  dangerous  is  when  they  stampede;  for  at  that  time, 
like  a  herd  of  frightened  cattle,  they  lose  all  reason,  and, 
closing  their  eyes,  rush  on,  destroying  not  only  themselves 
but  their  keeper. 

To  one  who  is  familiar  with  the  psychological  nature  of 
the  average  speculator,  it  will  be  apparent  that  anything 
like  bearish  operations  must  be  tabooed  till  prices  have  first 
been  forced  to  an  unnaturally  high  level.  For  the  manipu- 
lator to  force  prices  below  the  real  value  of  the  commodity 
is  dangerous  in  the  extreme.  But  he  is  not  always  sure  as  to 
whether  prices  are  above  or  below  their  natural  level;  and 
there  are  a  host  of  semi-professional  dealers  and  a  consider- 
able number  of  amateurs  who  are  bears  and  who  sell  short. 
Furthermore,  these  bears  know  the  danger  of  the  contract 
that  they  have  entered  into.  While  many  of  them  are  quite 
uninformed  about  the  actual  commodity  and  have  no 
facilities  for  getting  it  when  the  time  for  delivery  arrives, 
they  know  that,  for  them  at  least,  the  only  practicable  way 
in  which  they  can  cover  their  short  is  by  buying  a  long  con- 
tract. They  know  how  the  price  may  be  manipulated,  and 
how  they  may  find  themselves  at  any  time  under  the  power- 
ful necessity  of  bidding  for  the  commodity  amid  a  host  of 
stampeded  shorts,  and  they  are  fully  aware  of  the  usual 
effect  of  such  a  contest.  It  is  because  these  things  are  so 
well  in  mind  that  such  frequent  reference  is  made  in  market 
reviews  to  the  fact  that  prices  have  risen,  or  may  rise,  as  a 
result  of  the  covering  of  shorts. 

There  are  others  beside  the  amateur  speculators  and  the 
frightened  shorts  who  assist  the  market  manipulators  in 
putting  up  prices.  It  is  to  the  interest  of  the  commission 
man  that  the  market  be  advancing;  for  he  knows  that  in  bull 
markets  there  is  more  trading;  and,  when  trading  is  large, 
there  are  many  commissions.  Hence  the  broker  will  fre- 
quently send  out  bullish  circulars  hoping  to  get  his  clients 


THE  EFFECT  UPON  PRICES  73 

to  buy;  and  he  stands  ready  to  aid  in  any  way  in  working 
up  a  buying  fever  of  excitement. 

When  a  commodity  is  selling  upon  the  basis  of  its  de- 
mand and  supply  and  regularly  passing  into  consumption, 
the  market  manipulators  can  buy  it  with  comparative 
safety.  They  have  a  chance,  which  is  much  more  than  an 
even  one,  that  the  next  movement  of  the  market  will  be 
upward.  Having  loaded  up  with  a  good  line  and  the  bull 
campaign  having  opened,  the  manipulators  take  advantage 
of  the  assisting  influences  above  described.  They  nurse  a 
short  interest;  then  they  proceed  to  stampede  the  shorts 
into  buying  and  spread  terror  among  them  by  giving  out 
rumors  of  possible  corners  and  squeezes.  They  manipulate 
the  news,  give  out  bullish  interviews;  and,  assisted  as  they 
are  by  the  prejudices  of  the  amateur  speculators,  by  the 
covering  of  shorts,  and  by  the  self-interest  of  the  broker 
in  seeking  commissions,  generally  do  succeed  in  working 
up  a  bullish  excitement. 

This  matter  of  fighting  the  bears  is  always  important  in 
organized  markets.  The  bear,  by  his  contract,  has  agreed 
to  deliver  something  that  he  does  not  own.  Whether  or  not 
he  can  purchase  that  something  at  the  proper  place  and 
within  the  prescribed  time,  is  a  question;  and,  by  the  very 
conditions  of  an  organized  market,  there  are  many  others 
who  have  entered  into  similar  contracts.  The  supply  either 
of  a  security  or  of  a  speculative  commodity  is  for  most 
practical  purposes  limited.  The  stock  of  corporations  can- 
not be  increased  except  in  conformity  with  fixed  legal  pro- 
visions. In  the  same  way  the  supply  of  speculative  agricul- 
tural commodities  cannot  be  increased  till  the  next  crop  is 
harvested;  and  all  crops  are  subject  to  numerous  vicissi- 
tudes. Hence  the  bear  who  knows  his  business  is  most 
cautious  and  runs  at  the  slightest  scare. 

After  an  advance  has  been  engineered,  the  manipulator 
must  know  when  to  stop.  If  the  price  of  wheat,  for  in- 
stance, were  put  to  the  very  highest  figure  to  which  it  could 


74         VALUE  OF  ORGANIZED  SPECULATION 

be  forced,  consumption  would  be  reduced,  production 
would  be  increased,  and  an  enormous  supply  would  pile  up, 
which  could  not  fail  to  cut  short  the  advance.  Even  before 
that  event  occurred,  the  short  selling  would  begin  to  turn 
the  market.  Knowing  that  others  will  make  such  sales,  the 
professionals  who  have  manipulated  the  advance  anticipate 
future  events  by  closing  their  long  lines  and  going  short  in 
the  midst  of  the  bullish  enthusiasm  and  excitement,  which, 
to  the  superficial  observer,  appears  to  have  such  force  that 
it  will  never  stop,  but  which,  to  the  far-seeing  speculator, 
will  soon  usher  in  a  decline.  The  market  then  sags  off  as  a 
result  of  the  influences  above  mentioned. 

Hence  a  market  upon  the  speculative  exchanges  will  be 
one  in  which  the  price  moves  upward  from  a  basis  where 
the  commodity  will  pass  into  consumption,  but  in  which 
it  afterwards  sags  back  to  that  basis.  Upon  the  Chicago 
Board  of  Trade  it  is  a  tradition  that  the  wheat  must  be  low 
enough  during  the  crop-moving  season  so  that  contracts 
may  be  made  for  a  reasonable  amount  of  it  to  be  exported; 
but  for  many  months  of  the  year  the  market  will  be  above 
an  export  basis.  Indeed,  it  could  not  get  much  below  such 
a  basis,  as  there  are  so  many  artificial  influences  ready  at 
any  time  to  send  it  up  on  the  slightest  excuse.  The  same 
principles  which  govern  wheat  control  also  cotton  and 
other  speculative  commodities,  the  course  of  a  market 
being  in  the  same  way  from  a  consumption  or  export  basis 
upward  and  then  back  to  such  a  basis,  but  little  below  it  at 
any  time. 

The  above  discussion  applies  to  the  contract  grades. 
The  other  grades  sympathize  with  the  movement  in  the 
prices  of  futures  and  of  the  grades  on  which  futures  are 
based;  but  they  do  not  always  have  the  important  upward 
rushes  in  price  that  are  such  a  familiar  feature  of  the  future 
market.  Hence  the  non-speculative  grades  have,  to  a  con- 
siderable extent,  the  advantages  of  organized  speculation 
without  its  disadvantages.  By  reason  of  the  fact  that  they 


THE  EFFECT  UPON  PRICES  75 

sympathize  with  the  movement  of  the  speculative  grades, 
the  steadying  effect  of  short  selling  and  a  two-sided  market 
is  communicated  to  them.  And,  inasmuch  as  they  are  not 
themselves  speculative  favorites,  they  are  not  subject  to 
the  frequent  ups  and  downs  with  momentary  fluctuations 
which  are  characteristic  of  the  future  markets.  Further- 
more, even  at  times  when  the  contract  grades  are  so  high 
in  price  that  exports  are  shut  off,  the  non-contract  grades 
may  go  out  of  the  country  or  pass  into  consumption. 

The  relative  prices  of  contract  and  non-contract  grades 
should  throw  much  light  on  the  question  of  the  effect  of 
organized  speculation.  When  a  grade  is  made  deliverable 
on  contracts,  it  has  a  tendency  to  make  a  demand  for  it  for 
speculative  purposes  and  to  raise  its  price.  But  the  con- 
tinuous shifting  of  numerous  commercial  factors,  all  of 
which  have  their  effect  upon  prices,  renders  it  impossible 
to  show  such  a  tendency  by  a  table  of  price  movements. 
The  following  account  of  the  experience  of  the  Chicago 
Board  of  Trade  in  making  different  grades  deliverable  in- 
dicates the  sustaining  influence  of  speculation  on  prices :  — 

"Up  to  1891  we  accepted  No.  2  wheat,  no  matter  of  what 
variety.  The  wheat  then  produced  in  Iowa,  Nebraska,  and 
other  sections  tributary  to  this  market,  was  a  variety  incap- 
able, by  reason  of  its  inherent  qualities,  of  being  manufac- 
tured into  a  high  grade  of  flour.  It  was  so  inferior  to  No.  2 
Red,  No.  1  and  No.  2  Northern  Spring,  that  the  millers 
bought  these  latter  grades  and  let  the  No.  2  Spring,  the 
grade  above  referred  to,  alone.  It  accumulated  here  to  the 
extent  of  several  millions  of  bushels.  When  the  late  William 
T.  Baker  was  elected  president  of  the  Board  in  1891,  he,  in 
his  inaugural  address,  advocated  the  amendment  of  our 
rules  so  that  they  should  provide  only  for  the  delivery  of 
No.  2  Red  and  No.  1  Northern  Spring.  The  rules  were  so 
amended  by  vote  of  the  association.  The  effect  of  this  was 
to  completely  stop  the  production  of  inferior  wheat.  So 
long  as  it  was  deliverable  on  contracts  for  future  delivery, 


76          VALUE  OF  ORGANIZED  SPECULATION 

it  of  course  had  a  good  market.  It  sold  then  on  that  basis. 
The  other  grades  always,  that  is,  the  No.  2  Red  and 
No.  1  Spring,  always  sold  at  a  premium  over  it,  but 
when  this  delivery  privilege  was  taken  away  from  it, 
farmers  stopped  raising  it. 

"Again  the  No.  2  Hard  Winter  Turkish  wheat,  mainly 
produced  in  the  tablelands  of  western  Nebraska  and  west- 
ern Kansas,  northern  Oklahoma  and  the  Pan  Handle  of 
Texas,  for  many  years  was  not  deliverable  on  contracts  for 
future  sales.  After  a  few  years  from  the  time  its  production 
in  the  United  States  was  begun,  it  was  made  deliverable  at 
5  cents  discount,  later  this  was  made  3  cents  per  bushel  dis- 
count, and  then  this  penalty  was  removed  and  it  was  made 
equal  with  the  other  grades.  Its  production  thereby  was 
increased,  and  now  it  is  not  only  produced  as  largely  as  ever 
in  the  territory  named,  but  also  in  Missouri  and  Illinois. .  . . 

"I  suppose  that  it  may  be  truthfully  said  that  this  is  a 
question  of  making  a  market  and  of  destroying  a  market, 
and  that  such  result  might  have  been  reached  through 
ordinary  merchandising  channels  of  the  millers,  yet,  so 
soon  as  the  delivery  on  future  contracts  was  affected,  the 
production  of  the  grain  was  materially  affected.  May  we  not 
say,  then,  that  if  it  could  stop  the  production  in  the  one 
case,  and  increase  it  in  the  other  to  a  very  perceptible 
degree,  that  it  has  a  pronounced  influence  on  values?  That 
it  upholds  and  adds  to  the  value  of  that  which  is  desirable, 
that  it  bears  down  and  obliterates  that  which  is  unde- 
sirable?" ' 

To  the  writer  it  seems  highly  significant  that  the  stock 
of  a  grade  should  accumulate  while  it  is  good  delivery  on 
contracts  and  that  the  production  of  a  grade  should  be 
largely  increased  after  it  is  made  deliverable.  The  effect 
of  organized  speculation  is  to  make  a  demand  for  commodi- 
ties. It  would  not  be  possible  to  float  a  number  of  con- 

1  From  a  memorandum  furnished  by  Mr.  John  C.  F.  Merrill,  formerly 
President,  now  Secretary  of  the  Chicago  Board  of  Trade. 


THE  EFFECT  UPON  PRICES  77 

tracts  in  all  of  which  the  seller  legally  obligates  himself  to 
deliver  commodities  without  making  some  net  demand. 

As  regards  stocks  the  same  tendencies  are  to  be  noted. 
There  is  the  same  bullish  prejudice  among  the  rank  and  file 
of  speculators,  and  there  is  the  same  well-founded  feeling 
of  apprehension  on  the  part  of  the  shorts,  and  the  same 
class  of  professional  speculators  ready  to  take  advantage 
of  these  facts.  The  value  of  a  stock,  considered  as  an  in- 
vestment, is  determined  by  the  nature  of  the  security,  its 
class  and  conditions  of  issue,  and,  especially,  the  earning 
power  of  the  property  which  it  represents  both  present  and 
prospective.  There  are  so  many  conditions  entering  into 
the  problem  that  one  can  hardly  present  any  tables  or 
statistics  which  will  prove  the  point.  For  instance,  tables 
might  be  presented  showing  that  the  stocks  listed  upon  the 
New  York  Stock  Exchange  sell  at  an  exceedingly  high  price 
when  we  take  into  consideration  the  dividends  that  they 
pay.  But  such  a  table  would  be  inconclusive  from  the  fact 
that  there  are  advantages  of  holding  the  title  to  property 
in  the  form  of  stocks  other  than  that  of  having  them  listed 
upon  the  stock  exchange.  Thus  property  may  be  more 
easily  handled  and  divided,  and  enterprises  may  be  more 
easily  financed,  in  that  form.  Still  it  is  significant,  as  far 
as  the  argument  may  go,  that  listed  stocks  sell  at  high 
prices  when  their  earning  power  is  considered. 

Perhaps  the  best  indication  that  organized  speculation 
has  a  tendency  toward  giving  stocks  a  higher  value  is  the 
attitude  of  those  who  have  them  to  sell.  The  promoters 
and  organizers  of  great  companies  are  the  manufacturers 
of  stocks  in  the  same  way  that  the  farmers  are  the  pro- 
ducers of  agricultural  products,  and  upon  the  stock  ex- 
change we  have  the  same  general  characteristics  of  dealing 
as  upon  the  board  of  trade.  Stocks  may  be  either  bought 
for  long  account  or  sold  for  short  account  with  the  greatest 
facility  and  can  be  held  for  either  account  for  considerable 
periods  of  time.  Yet  the  promoters  and  others  interested 


78         VALUE  OF  ORGANIZED  SPECULATION 

in  marketing  stocks  are  anxious  to  get  them  listed  upon  the 
exchange,  even  though  the  conditions  may  be  onerous;  for 
they  know  that  there  is  the  place  where  undigested  securi- 
ties are  best  made  digestible.  The  reason  why  these  manu- 
facturers of  securities  take  such  a  different  view  from  that 
of  producers  of  agricultural  products,  is  because  these  pro- 
moters are  usually  familiar  with  the  ways  of  organized 
speculation  and  know  the  tendency  of  a  market  so  gov- 
erned; while  the  farmer,  as  a  usual  thing,  knows  little  of 
speculative  markets. 

Corners 

The  nervousness  of  the  bear,  and  the  dangerous  nature 
of  the  contract  that  he  has  entered  into,  have  been  referred 
to;  and  he  is  not  apprehensive  without  cause.  The  pur- 
chaser of  a  commodity  may  have  a  light  margin;  but  he  at 
least  knows  that  there  is  a  limit  beyond  which  the  price 
cannot  decline.  The  short  seller,  on  the  contrary,  knows 
no  limit  to  a  possible  advance  in  price.  The  purchaser  of 
wheat  at  $1  knows  that  at  least  $1  per  bushel  will  be  the 
extreme  limit  of  margin  calls.  But  the  short  seller,  on  the 
contrary,  has  no  such  assurance.  The  commodity  may  go 
to  $2  per  bushel,  and  even  then  he  will  be  in  doubt  as  to 
whether  the  top  is  reached. 

The  corners  which  have  occurred  are  a  perpetual  object 
lesson  hi  the  mind's  eye  of  the  bear,  warning  him  of  the 
danger  of  his  position.  Such  price  movements  may  take 
place  entirely  independent  of  the  value  of  a  stock  for  an  in- 
vestment or  of  a  commodity  for  use.  They  furnish  the  ex- 
planation of  the  advice  celebrated  for  its  wisdom,  but 
notorious  for  its  bad  grammar,  which  is  said  to  have  been 
given  by  Daniel  Drew,  namely,  —  "Young  man,  don't  you 
never  sell  nothing  that  you  don't  own." 

In  the  year  1897  the  agriculturalist  in  this  country  was 
perhaps  more  discouraged  than  at  any  other  time  before  or 
since;  and  it  seemed  as  if  there  was  no  demand  for  anything 


THE  EFFECT  UPON  PRICES  79 

that  the  farmer  or  planter  produced.  The  price  of  wheat, 
for  instance,  had  fallen,  and  all  looked  to  it  as  an  index  of 
values  for  agricultural  products.  The  farmer,  it  appeared, 
was  destined  to  grow  his  crop,  bring  it  to  market,  and  get 
for  it  the  most  absurdly  low  price.  Every  product  of  the 
farm  was  at  the  lowest  ebb.  Cotton,  cereals,  butter,  eggs, 
vegetables  —  all  were  low  in  price.  But  in  the  summer  of 
the  year  mentioned,  there  were  noticeable  some  signs  of  im- 
provement. A  mysterious  upward  movement  began  in 
wheat  alone  of  all  commodities;  and  the  news  soon  came 
upon  the  tape  that  Joseph  Leiter  was  attempting  a  corner. 
Amidst  the  sneers  and  gibes  of  those  who  believed  that  the 
farmer  must  always  suffer  in  silence,  and  while  agricultural 
products  that  were  not  the  subject  of  organized  specula- 
tion still  remained  low,  the  wheat  market  was  manipulated 
upward  until  $1.85  was  reached.  The  high  point  in  the 
price  movement  of  the  cereal  was  soon  passed,  as  corners 
are  but  temporary,  and  only  wheat  deliverable  on  futures 
rose  to  the  price  mentioned.  But  this  startling  example, 
occurring  at  that  particular  time,  was  enough  to  give  an  in- 
dication, even  to  the  most  careless  observer,  as  to  who  it  is 
that  is  ever  ready  with  any  excuse  to  raise  prices. 

The  writer  makes  no  defense  of  corners  considered  from 
either  a  moral  or  commercial  standpoint;  but  he  confesses 
that  he  fails  to  follow  the  arguments  of  those  who  hold  that 
organized  speculation  puts  prices  down.  If,  as  has  been 
said,  the  speculators  have  only  to  sell  any  quantity  of 
"wind"  or  "phantom"  wheat  in  order  to  cause  a  decline, 
why  did  they  not  do  it  on  this  particular  occasion?  The 
facts  are  that  the  price  went  up  because  so  much  wheat 
had  been  sold  and  the  shorts  were  so  anxious  to  cover. 
Even  upon  the  board  of  trade,  speculators  cannot  be 
found  foolish  enough  to  sell  indefinite  quantities  of  short 
wheat,  nor  would  they  have  money  enough  adequately  to 
margin  the  enormous  quantities  frequently  supposed. 

Or,  again,  if  the  reader  had  been  watching  the  quota- 


80         VALUE  OF  ORGANIZED  SPECULATION 

tions  as  they  came  over  the  ticker  at  the  time  of  the  Hut- 
chinson  corner  in  1888,  when  the  manipulated  future  went 
to  $2  per  bushel,  the  other  futures  following  much  behind, 
how  could  he  help  but  be  impressed  with  the  idea  that 
organized  speculation  is  more  important  as  a  cause  of 
advances  in  price  than  of  declines? 

The  Commodity  in  Store 

The  warehouse  receipts  which  are  deliverable  in  settle- 
ment of  contracts  are  merely  the  representatives  of  so 
much  of  the  commodity,  and  the  law  is  strict  which  pro- 
hibits the  forging  of  these  receipts  or  their  issue  in  excess 
of  the  amount  in  store.  But,  referring  to  the  futures  of 
wheat,  this  "wind,"  as  it  is  sometimes  called,  may  be 
created  in  any  amount,  provided  there  be  parties  who  are 
willing  to  run  the  risk  of  so  creating  it  and  who  put  up  se- 
curity. All  that  is  necessary  to  bring  into  existence  a  lot  of 
5000  bushels,  or  any  number  of  bushels,  is  for  a  seller  and  a 
buyer  to  agree  on  a  price  for  the  wheat  to  be  delivered  in  a 
future  month;  and  if  proper  margins  are  deposited,  this 
contract,  this  "wind  "  —  whatever  it  may  be  called  —  en- 
ters upon  the  market  and  constitutes  a  part  of  the  supply 
of  contracts.  On  the  other  hand,  it  must  be  admitted  that 
an  indefinite  number  of  legal  obligations  are  not  likely  to 
be  entered  into  without  any  provision  for  ever  fulfilling 
those  obligations.  While  it  is  freely  conceded  that  "wind" 
wheat  can  be  created  to  any  amount,  subject  to  the  condi- 
tions just  mentioned,  yet  sane  business  men  will  not  enter 
into  large  contracts  for  the  delivery  of  the  commodity  un- 
less there  is  a  supply  of  it  in  the  elevators,  or  in  the  country 
contiguous  in  such  a  position  that  it  can,  if  the  need  should 
arise,  be  placed  in  the  elevators  in  time  for  delivery.  And 
the  tendency  always  is  to  pile  up  the  reserve  in  the  delivery 
city,  in  order  to  give  a  feeling  of  security  to  the  bears 
who  may  be  called  upon  for  a  literal  fulfillment  of  their 
contracts. 


THE  EFFECT  UPON  PRICES  81 

In  order,  then,  to  have  a  broad  speculation  in  wheat  with 
extensive  short  selling,  we  must  have  a  large  reserve;  and 
in  order  to  furnish  this  reserve,  a  great  demand  is  made  on 
the  farmers  to  bring  forward  the  wheat,  thus  tending  to  ad- 
vance the  price  of  the  cash  article.  It  is  common,  in  farm- 
ers' institutes  and  in  publications  that  are  devoted  to  the 
supposed  interests  of  the  farmer,  to  advocate  the  segrega- 
tion and  holding  of  agricultural  products  in  order  to  keep 
up  the  price.  We  have  the  celebrated  "Hold  your  Wheat" 
circular  of  some  years  ago  as  an  example;  and  numerous 
combinations  of  the  sort  have  been  organized  for  holding 
wheat,  cotton,  and  other  agricultural  productions.  Gov- 
ernments, too,  in  different  countries  have  undertaken  to 
hold  coffee,  raisins,  and  other  commodities  for  the  purpose 
of  advancing  the  price. 

If  it  be  thought  desirable  to  raise  the  price  of  a  commod- 
ity by  holding  a  large  quantity  of  it  from  pressing  on  the 
market,  the  method  described  above,  which  is  now  in  op- 
eration upon  the  speculative  exchanges,  is  by  far  the  most 
effective.  The  volume  of  speculation  is  so  large  that  even 
the  few  deliveries  which  take  place,  though  they  are  but  a 
small  percentage  of  the  amount  represented  by  the  con- 
tracts traded  in,  are  yet  of  considerable  size  in  the  absolute. 

The  advantage  of  this  method  can  perhaps  best  be  ap- 
preciated by  comparing  it  to  methods  that  are  similar, with 
the  exception  that  the  buyers  are  other  than  the  specula- 
tors to  be  found  upon  the  exchanges.  The  most  successful 
of  these  schemes  is  the  so-called  valorization  plan  for  rais- 
ing the  price  of  coffee. 

The  State  of  Sao  Paulo  in  Brazil,  finding  that  the  coffee 
planters  were  oppressed  with  very  low  prices  owing  to  the 
large  crop  of  the  season  1906-07,  undertook  the  experi- 
ment of  buying  coffee  and  holding  a  part  of  the  purchases 
from  the  market,  with  a  view  to  enhancing  the  price.  This 
it  was  able  to  do  through  loans  made  by  international 
syndicates. 


82         VALUE  OF  ORGANIZED  SPECULATION 

As  for  the  success  of  the  scheme,  it  must  be  admitted 
that  there  has  been  a  great  rise  in  the  price  of  coffee  during 
the  five  years  that  the  plan  has  been  in  operation,  and  part 
at  least  of  this  advance  should  be  attributed  to  valoriza- 
tion. Nevertheless,  there  is  little  reason  for  considering  it 
the  controlling  factor.  It  would  carry  this  essay  too  far 
afield  if  an  attempt  were  made  to  discuss  all  the  influences 
which  have  affected  the  price  of  coffee  during  the  last  few 
years.  It  should,  however,  be  called  to  mind  that  the  crop 
of  coffee  in  1910-11  was  little  over  half  of  that  of  1906-07, 
and  intervening  crops  have  also  been  small;  hence  there 
is  as  good  reason  for  saying  that  the  crop  situation  enabled 
the  valorization  scheme  to  keep  on  its  feet  as  there  is  for 
saying  that  valorization  controlled  and  overcame  the  crop 
situation.  Furthermore,  the  well-known  fact  that  nearly 
all  commodities  have  advanced  in  price  in  recent  years 
(some  of  them  more  than  coffee)  should  throw  further  light 
upon  the  matter.  Thus  there  is  slight  justification  for  de- 
claring that  the  rise  in  the  price  of  coffee  is  necessarily  to 
be  attributed  to  valorization. 

The  best  way  in  which  the  two  methods  of  enhancing 
prices  can  be  compared  is  by  considering  the  economic 
strength  of  the  respective  forces  that  are  behind  them.  In 
the  case  of  a  scheme  such  as  that  for  valorization,  in  which 
the  Government  or  a  syndicate  buys  a  quantity  of  the  com- 
modity for  the  express  purpose  of  raising  the  price,  we  have 
a  demand  which  has  been  created  for  purely  manipulative 
purposes;  and  the  buyers  in  such  case  are  naturally  timid. 
Such  an  agreement  also  is  likely  to  be  tainted  with  illegal- 
ity, as  witness  the  attack  of  the  United  States  Government 
I/upon  the  valorization  scheme.  In  the  case  of  a  syndicate, 
there  is  danger  that  one  member  of  the  syndicate  or  com- 
bination will  sell  out  on  the  others.  If  the  commodity  be 
pooled  in  such  a  way  that  no  member  may  sell  his  share,  it 
is  still  possible  to  sell  the  commodity  short.  And  even  in 
a  case  in  which  a  sovereign  state  is  behind  such  a  venture, 


THE  EFFECT  UPON  PRICES  83 

there  is  doubt  as  to  whether  it  could  overcome  the  laws  of 
trade. 

In  contrast  we  have  the  action  of  the  speculative  ex- 
changes, in  which  the  demand  is  backed  by  certain  powerful 
moving  forces  in  human  nature,  so  strong  that  there  is  a 
perpetual  stream  of  speculators  entering  the  market  to  bear 
the  load.  And  usually  the  new  traders  coming  in  are  more 
than  able  to  take  the  place  of  those  who  drop  out.  The 
speculators,  also,  be  it  noted,  have  not  been  over-persuaded 
to  undertake  to  carry  the  commodity,  but  have  under- 
taken it  voluntarily,  through  the  hope  of  personal  gain;  and, 
however  delusive  their  hopes  may  be,  the  human  passion 
that  moves  them  is  one  of  the  strongest.1 

The  writer  is  well  aware  that  a  large  supply  of  the  com- 
modity piled  up  in  the  elevators  and  warehouses  is  a  bear 
argument.  The  traders  make  a  mental  estimate  of  the 
amount  that,  in  their  opinion,  should  constitute  the  pro- 
per stock  in  a  particular  position;  and,  if  the  actual  stock 
appears  large,  they  have  a  tendency  to  become  bearish  and 
sell  the  commodity.  The  gauging  of  the  proper  price  by  the 
relative  size  of  the  stock  on  hand  is  one  of  the  very  best 
methods  of  legitimately  determining  values.  But  the  con- 
siderations just  mentioned  by  no  means  negative  the  idea 
that  a  large  average  stock  is  rendered  necessary  by  the  fact 
that  there  are  so  many  short  contracts  afloat,  and  that  the 
bear  must  have  some  of  the  commodity  in  sight  in  order  to 
give  him  even  such  little  legitimate  ground  as  he  has  for  his 
confidence  and  his  recklessness. 

Furthermore,  when  it  is  said  that  the  tendency  of  organ- 
ized speculation  is  toward  large  stocks  of  the  commodities 
traded  in,  it  is  not  denied  that  there  are  other  tendencies 
which  may  at  times  exercise  the  controlling  influence. 

1  As  regards  the  value  of  securities  the  well-known  failures  of  govern- 
ments to  bolster  up  the  value  of  inconvertible  paper  money  and  other 
obligations  need  scarcely  be  called  to  mind.  Cf.  Conant,  The  Principles  of 
Money  and  Banking,  book  vi,  chap.  iv. 


84          VALUE  OF  ORGANIZED  SPECULATION 

Modern  means  of  communication  and  methods  of  hand- 
ling business  have  been  so  perfected  that  it  is  possible  to 
pursue  what  is  called  the  policy  of  buying  from  hand  to 
mouth.  Hence  an  importing  nation,  such  as  Great  Britain, 
may,  under  present  conditions,  carry  a  smaller  stock  than 
would  have  been  thought  necessary  in  former  times.  In- 
deed, the  English  often  complain  that  their  stocks  are  too 
small  under  modern  trade  conditions,  especially  in  view  of 
possible  wars.  However,  the  facts  just  referred  to  by  no 
means  prove  that  speculation  is  not  the  cause  of  larger 
world's  stocks,  other  conditions  remaining  the  same.  What 
they  do  show  is  merely  that  an  importing  nation  is  forcing 
the  exporting  nations  to  carry  stocks  in  accordance  with  a 
general  tendency  observable  on  every  hand.  Taking  the 
wheat  market  as  an  example,  it  is  readily  seen  that  the 
large  quantities  of  the  cereal  held  in  the  speculative  cen- 
tres ready  to  deliver  on  contracts,  and  the  habit  of  the 
speculators  in  building  up  such  large  stocks  before  they 
will  commit  themselves  extensively  on  the  bear  side,  con- 
stitute a  demand  for  it;  thus  enabling  this  country,  for  in- 
stance, to  carry  the  stock  with  little  pressure  upon  the  pro- 
ducers,  as  it  is  the  speculator  who  pays  the  bill. 

At  short  range  the  speculative  contest  resolves  itself  into 
a  fencing  match  which  centres  around  the  question  of 
whether  these  supplies  are  large  enough  to  meet  the  needs 
of  the  bears.  There  is  always  wheat  enough  for  actual  use 
in  the  countries  of  modern  development.  Any  unseemly 
scramble  among  millers  to  buy  wheat  or  among  consumers 
to  buy  flour  causes  only  a  mild  disturbance.  But  upon  the 
board  of  trade  it  is  apparent  that  the  price  fixed  is  often 
above  that  at  which  the  commodity  would  actually  pass 
into  consumption.  Bears  are  always  trying  their  luck  to 
see  if  they  cannot  sell  short  and  so  reap  a  profit  by  a  de- 
cline to  the  natural  price,  but  their  attempts  to  do  this  are 
continually  thwarted  by  squeezes,  and,  more  rarely,  by  real 
corners.  So  the  price  is  forced  up  and  kept  high  for  consid- 


THE  EFFECT  UPON  PRICES  85 

erable  periods  of  time  by  the  repeated  demands  of  the 
shorts  for  the  commodity  to  fill  their  contracts. 

The  old  supply  is  usually  withdrawn  each  year;  but  a 
part  of  it  is  continuous,  as  a  certain  amount  of  the  new 
crop  is  put  back  into  the  stock.  From  this  fact  some  might 
draw  the  conclusion  that,  as  one  crop  replaces  another, 
there  is  no  new  demand  for  speculative  purposes  from  year 
to  year.  But  this  supply,  which  is  necessary  in  order  that 
there  may  be  any  speculation,  tends  to  grow  larger  and  * 
larger  each  year,  notwithstanding  other  general  tendencies 
in  an  opposite  direction,  and  notwithstanding  the  repeated 
fluctuations  in  the  stock.  Besides,  there  is  a  loss  in  weight 
and  other  elements  of  value,  even  in  keeping  a  commodity 
which  can  be  as  easily  preserved  as  wheat;  so  that  the 
warehousing  of  large  supplies  causes  consumption  in  that  y 
measure. 

The  Street  Supply  of  Stocks 

In  the  above  discussion  and  throughout  this  essay,  the 
wheat  market  has  been  frequently  used  as  an  illustration. 
Yet  the  conclusions  arrived  at  are  applicable  to  corn,  pork, 
cotton,  and  several  other  agricultural  commodities,  and 
also  to  securities  which  are  speculated  in  upon  the  ex- 
changes. The  demand  for  commodities  for  speculative 
purposes  contributed,  while  this  country  was  growing  and 
before  manufacturing  was  well  developed,  to  counteract 
other  commercial  tendencies;  thus  making  a  special  de- 
mand for  agricultural  products,  which  at  that  time  were 
particularly  profitable,  and  when  they  were,  in  a  more  im- 
portant sense  than  at  present,  our  natural  products. 

The  market  for  stocks  also  was  greatly  helped  at  the 
time  by  the  speculative  demand.  In  the  development  of 
this  country  which  took  place  during  the  nineteenth  cen- 
tury, the  extraordinarily  expensive  operation  was  under- 
taken of  transforming  the  transportation  facilities  from  a 
system  which  required  little  capital  to  one  in  which  a  great 


86          VALUE  OF  ORGANIZED  SPECULATION 

outlay  was  necessary.  The  railroads  when  first  built  sel- 
dom paid  any  net  income.  They  were  considered  foolhardy 
enterprises  at  the  time,  because  they  sought  to  accomplish 
an  object  by  untried  means.  They  were  foolhardy  enter- 
prises from  a  cold-blooded  investment  standpoint,  because 
no  one,  not  even  the  wisest,  could  tell,  till  after  years  of 
trial,  whether  that  particular  method  of  transportation  was 
really  practicable,  and  because  at  the  time  there  were  not 
proper  arrangements  for  conducting  such  corporations  and 
systematizing  them.  The  costly  experiment  of  undertaking 
these  things  was  paid  for  by  speculators. 

In  the  history  of  most  of  our  great  transportation  enter- 
prises some  broad-minded  and  imaginative  man  has  usu- 
ally figured  as  the  original  moving  force.  He,  in  his  enter- 
prising spirit,  has  planned  the  road;  he  has  put  in  some  of 
his  own  capital,  perhaps,  and  has  induced  conservative 
capitalists  to  take  bonds.  But  as  these  great  enterprises  at 
the  start  are  so  hazardous,  he  could  not  find  a  sufficient 
number  of  broad-minded  and  imaginative  men  who  were 
willing  to  run  the  risk  of  taking  all  of  the  common  stock. 
The  manner  in  which  this  stock  was  actually  placed  was 
for  the  promoters  to  go  into  the  stock  exchange  and,  by 
wash  sales  and  otherwise,  to  induce  speculation,  and  so 
create  a  purely  speculative  demand. 

There  were  not  at  that  time  large  masses  of  capital 
seeking  investment,  and  investors  were  cautious.  But 
Wall  Street  was  just  developing;  it  must  have  something  to 
speculate  with,  and  it  took  the  stocks  of  the  new  enter- 
prises which  others  refused.  The  new  securities  became 
speculative  favorites,  and  they  constituted  a  large  part  of 
the  street  supply  of  stocks  which  circulated  from  hand  to 
hand  on  the  exchange  in  making  deliveries.  If  these  stocks 
had  not  been  sold  to  Wall  Street  speculators  at  first,  there 
would  have  been  great  delay  in  financing  such  undertak- 
ings, and  our  railroad  system  would  have  been  many  years 
behind  its  present  development.  For,  let  it  be  remembered, 


THE  EFFECT  UPON  PRICES  87 

that,  even  in  the  enterprises  which  afterwards  turned  out 
to  be  good  income  producers,  the  investor  usually  lost 
what  was  first  put  in. 

It  is  not  attempted  here  to  justify  practices  which  have 
made  some  of  the  worst  pages  of  our  financial  history.  It  is 
merely  pointed  out  that  the  first  stage  in  the  digestion  of 
common  stock  has  been  its  sale  to  adventuring  speculators. 
Later,  when  an  enterprise  has  passed  through  different 
receiverships  and  several  reorganizations,  when  there  has 
grown  to  be  a  demand  for  what  it  furnishes,  when  the  man- 
agement of  the  corporation  has  improved  and  dividends 
have  become  regular;  then  the  stock  passes  to  the  last  stages 
of  digestion,  and,  leaving  the  hands  of  speculators,  is  taken 
up  by  careful  investors  and  business  men.  But  it  is  specula- 
tors who  supply  the  place  of  men  of  imagination  and  insight 
in  first  absorbing  the  stock,  and  it  is  also  the  speculators 
who  try  it  out,  and  subject  it  to  such  buffetings  upon  the 
exchanges  that  the  management  is  forced  to  improve  and 
so  give  the  stock  a  good  value. 

Different  Nations  and  Classes 

The  effect  of  the  frequent  upturns  in  prices  caused  by 
speculation  upon  the  exchanges  is  beneficial,  as  has  been 
shown,  to  the  people  of  this  country,  for  our  exports  consist 
largely  of  agricultural  products,  the  most  important  of  which 
are  speculated  in  upon  the  exchanges;  and  the  stocks  and 
securities  used  to  finance  our  productive  enterprises  are 
also  the  subject  of  organized  speculation.  But  not  all 
classes  of  the  people  experience  the  benefit  to  an  equal 
degree;  and  some  of  them,  pending  adjustments  of  prices  to 
ever-changing  conditions,  are  no  doubt  injured.  The  injury 
is  not  so  great,  however,  as  is  ordinarily  supposed,  for  the 
number  of  those  who  get  their  living  directly  from  the  soil 
is  large;  and,  when  agriculture  is  prosperous,  our  manufac- 
turers and  other  producers  find  their  profits  increased. 

If  there  be  any  classes  that  are  not  benefited  by  specu- 


88          VALUE  OF  ORGANIZED  SPECULATION 

lative  booms  in  agricultural  products,  they  are  such  as 
depend  upon  fixed  incomes  from  investments  or  upon  salar- 
ies, fees,  or  wages.  Considering  first  those  who  live  upon 
the  interest  of  money  lent  or  from  the  income  of  stocks, 
bonds,  or  other  securities,  it  should  be  noted  that  they  are 
always  anxious  that  agriculture  be  prosperous.  To  explain 
the  reason,  we  might  call  to  mind  such  years  as  1894,  1895, 
or  1896.  The  price  of  food  and  other  agricultural  products 
was  low  in  those  years;  and,  as  a  result,  the  conditions  that 
prevailed  in  our  basic  industry  made  the  income  precarious 
on  investments  which  would  otherwise  have  been  profit- 
able. 

Taking  the  legal  profession  as  an  example  of  the  fee- 
receiving  classes,  it  might  be  noted  that  while  there  is  much 
litigation  even  in  bad  times,  yet,  if  others  are  prosperous, 
the  lawyer  can  better  collect  his  fees.  Or,  considering  those 
who  live  upon  salaries  or  wages,  it  may  be  admitted  that 
wages  have  not  risen  as  much  as  the  cost  of  living;  yet  the 
reply  frequently  made  must  be  considered,  namely,  that 
when  business  is  active,  there  are  fewer  workers  out  of 
employment  and  there  are  a  greater  number  of  salaried 
positions. 

As  regards  different  countries  it  may  be  noted  that  some 
of  them  have  interests  quite  at  variance  with  ours.  Let  us 
take  England  as  an  example.  In  that  country  manufactur- 
ing is  more  important  than  agriculture;  and  it  is  desirable 
from  a  British  standpoint  that  manufactured  articles  be 
high  in  price.  To  the  Englishman  the  speculative  booms 
and  corners  in  agricultural  products,  which  are  features  of 
trading  upon  the  exchanges,  are  not  welcome.  It  is  natural, 
therefore,  that  the  English  should  look  with  dislike  upon 
such  speculators  as  Leiter  and  Hutchinson,  and  that  Mr. 
Patten  should  have  been  mobbed  upon  the  floor  of  the 
Manchester  Cotton  Exchange. 

As  regards  the  question  of  the  rate  of  profit  and  of  inter- 
est, the  conditions  in  England  are  quite  different  from  ours. 


THE  EFFECT  UPON  PRICES  89 

The  English  have  a  surplus  of  capital  which  they  are  con- 
tinually investing  in  other  countries.  Desiring,  then,  as  they 
do,  a  high  investment  yield,  they  naturally  seek  low  prices 
for  bonds,  stocks,  and  securities;  and  nothing  can  exceed 
the  disgust  of  the  English  financial  writers  and  authorities 
when  they  discuss  the  great  speculative  booms  so  often  seen 
upon  the  New  York  Stock  Exchange. 

There  are  very  few  countries  whose  interests  are  similar 
to  England's  hi  this  respect;  and  most  nations  are  benefited 
by  speculative  booms,  whether  they  occur  in  the  raw  ma- 
terials usually  speculated  in  upon  the  commodity  exchanges 
or  in  the  securities  used  in  advancing  productive  enter- 
prises. Nevertheless,  it  must  be  admitted  that  the  organiza- 
tion of  speculation  does  not  affect  all  nations  in  precisely 
the  same  way;  and  that,  despite  the  economic  compensa- 
tions and  adjustments,  all  classes  of  the  people  are  not 
equally  benefited. 

Cotton  Exchanges 

In  order  that  speculation  may  be  fully  organized,  it  is 
necessary  that  the  article  traded  in  be  representative  — 
that  is  to  say,  it  must  be  capable  of  being  designated  in  a 
uniform  manner.  Furthermore,  it  is  highly  advantageous 
in  the  interest  of  fairness  that  the  sources  from  which  the 
commodities  or  securities  may  be  got,  should,  so  far  as  pos- 
sible, be  matters  of  common  knowledge,  and  that  the  field 
from  which  they  may  be  procured  should  be  a  wide  one. 

More  than  one  well-known  corner  in  Erie  is  brought  to 
mind  in  this  connection.  In  the  case  of  the  corner  in  that 
stock  which  occurred  in  1866,  the  speculator  whom  some 
were  attempting  to  squeeze  was  also  treasurer  of  the  com- 
pany, and  he  had  lent  money  to  the  Erie  on  the  security  of 
certain  of  its  bonds  which  were  convertible  into  stock.  But 
this  latter  fact  was  not  generally  known  on  the  street. 
Accordingly,  after  inducing  the  bulls  to  make  extensive 
purchases,  the  holder  of  the  bonds  converted  them  into 


90         VALUE  OF  ORGANIZED  SPECULATION 

stock  and  made  delivery  on  his  sales,  thus  causing  a  terrible 
break  with  great  losses  to  those  who  were  caught  long. 
Such  practices  are  usually  considered  more  as  tricks  than 
as  legitimate  commercial  transactions;  and,  in  recent  years, 
traders  have  looked  carefully  in  carrying  on  operations  to 
any  possibility  of  converting  bonds  into  stock  in  the  man- 
ner described. 

The  difficulty  of  providing  adequate  rules  which  will  con- 
trol the  deliveries  is  not  great,  however,  in  the  case  of  stock 
exchanges,  since  securities  are  homogeneous  and  readily 
divisible;  and  it  is  only  by  some  slip  of  the  law,  as  in  the 
illustration  just  referred  to,  that  there  can  be  any  uncer- 
tainty. Yet  there  are  many  cases  where  the  dealers  in  com- 
modities would  like  the  help  of  organized  speculation  in 
carrying  them;  but  they  cannot  get  this  owing  to  the  fact 
that  there  is  not  enough  of  the  commodity  of  a  particular 
grade  to  make  the  necessary  deliveries  and  to  avoid  the 
danger  of  frequent  corners.  To  remedy  this  difficulty  it  has 
been  provided  in  some  exchanges  that,  if  the  seller  wishes, 
he  may  deliver  a  better  grade  than  the  one  on  which  the  con- 
tract is  based,  or  he  may  deliver  an  inferior  grade  with  a 
penalty  which  is  supposed  to  cover  the  difference  between 
its  value  and  that  of  the  higher  grade,  thus  widening  the 
field  of  possible  deliveries. 

Upon  cotton  exchanges  this  question  of  varying  grades 
has  caused  much  trouble.  Widely  extended  rains,  for  in- 
stance, at  a  critical  period  in  the  season  may  lower  the 
grade  of  a  large  part  of  the  crop.  Hence,  in  different  years, 
the  amount  of  a  grade  which  can  pass  into  consumption 
and  be  delivered  on  contracts  will  greatly  vary;  and  it  is 
particularly  necessary  to  provide  for  substitution  of  grades 
in  making  deliveries.  There  is  nothing  in  the  least  repre- 
hensible per  se  in  providing  for  this  necessary  substitution; 
for  it  is  plain  that,  if  only  one  grade  be  deliverable  on  con- 
tracts, the  liability  to  corners  is  greater  than  if  several 
grades  are  so  deliverable. 


THE  EFFECT  UPON  PRICES  91 

In  order  thus  to  widen  the  field  of  possible  deliveries,  an 
ingenious  system  has  been  provided  by  means  of  which 
the  price  of  a  future  may  be  based  upon  a  particular  grade; 
but  other  grades  may  be  substituted  in  making  deliveries, 
with  an  allowance  which  is  intended  to  make  the  substitu- 
tion equitable.  At  the  New  Orleans  Cotton  Exchange  the 
basis  is  middling  cotton;  but  other  grades  may  be  delivered 
on  contracts  at  certain  differences,  which  are  changed  by  a 
committee  to  conform  to  the  daily  fluctuations  of  the  dif- 
ferent grades  in  the  spot  market.  The  New  York  Cotton 
Exchange  employs  a  similar  system,  except  that  the  differ- 
ences are  not  revised  as  often  as  at  New  Orleans. 

The  length  of  time  that  elapses  between  the  different 
revisions  is  of  the  greatest  importance,  however,  and  the 
New  York  Cotton  Exchange  has  been  criticized  because  its 
revisions  are  not  more  frequent.1  It  is  argued  that  condi- 
tions may  change  after  the  differences  between  the  grades 
have  been  fixed,  so  that  a  grade  may  be  over-valued,  or  the 
reverse.  The  result  of  such  a  false  valuation  might  be  that 
a  considerable  margin  of  difference  would  arise  between  the 
spot  price  of  middling  cotton  and  the  price  for  contracts. 
Hence,  it  is  reasoned  that  by  an  economic  process  some- 
what similar  to  Gresham's  Law,  the  over-valued  grades 
establish  the  price  at  which  the  contracts  are  sold;  and, 
between  the  revisions,  a  system  analogous  to  the  alterna- 
tive process  of  bimetalism  results.  Consequently,  the  price 
of  the  future,  which  ostensibly  represents  the  price  of  the 
grade  on  which  it  is  based,  may  be  at  a  discount  from  the 
price  of  such  grade. 

The  charge  has  therefore  been  made  that  this  method  of 
adjusting  differences  tends  to  depress  prices.  The  reason 
assigned  is  that  the  system  of  handling  cotton  is  based 
upon  the  prices  for  futures;  and  dealers  at  outside  points, 
in  making  bids  to  producers  for  then-  cotton,  do  not  in  all 

1  Cf.  Commissioner  of  Corporations,  Report  on  Cotton  Exchanges, 
passim. 


92          VALUE  OF  ORGANIZED  SPECULATION 

cases  understand  why  it  is  that  futures  are  depressed. 
Therefore  considerable  time  may  elapse,  and  much  cotton 
change  hands  at  inequitable  prices,  before  the  proper  ratio 
is  again  established. 

The  officers  and  members  of  the  New  York  Cotton  Ex- 
change, however,  do  not  take  the  pessimistic  view  of  their 
system  just  stated;  and  while  it  is  admitted  that  there 
should  be  revision  of  differences,  it  is  nevertheless  held 
that  the  contracts  should  be  calculable  ones,  and  that 
a  great  frequency  of  revision  makes  an  unnecessary  uncer- 
tainty in  regard  to  what  a  purchaser  is  to  get  when  the 
cotton  is  delivered  to  him.  Still,  in  order  to  avail  itself  if 
possible  of  the  best  that  is  in  the  different  systems,  the 
New  York  Cotton  Exchange  has  amended  its  by-laws  so 
that  the  revision  committee  will  revise  the  differences  three 
times  instead  of  twice  a  year  as  formerly;  and  there  is  a 
disposition  to  await  the  result  of  the  enforcement  of  the 
new  rules. 

In  the  meantime  it  should  be  remembered  that  the 
special  difficulties  to  be  overcome  in  a  particular  case,  while 
they  may  cause  modification  of  rules  of  action,  should  not 
be  the  ground  for  sweeping  changes.  The  cotton  exchanges 
are  obliged  to  meet  a  difficult  situation,  such  as  does  not 
exist  in  other  exchanges;  and  it  will  require  further  time 
before  all  parties  are  agreed  as  to  the  best  method  of  adjust- 
ing the  controverted  matters.  The  abuses  which  may  grow 
up  in  a  particular  Kne  of  trade  should  not  be  confounded 
with  the  principles  of  organized  speculation  itself. 

Summary  of  the  Upward  Tendencies 

As  a  result  of  the  conditions  described,  commodities  that 
are  the  subject  of  organized  speculation  can  be  kept,  and 
usually  are  kept,  above  their  export  or  consumption  value  a 
part  of  the  time  each  year.  It  is  admitted  that  contracts 
entered  into  to  deliver  in  the  future  constitute  the  supply 
of  such  contracts,  and  it  is  further  admitted  that  contracts 


THE  EFFECT  UPON  PRICES  93 

to  deliver  enormous  quantities  are  so  entered  into  upon  the 
exchanges.  But  after  conceding  the  above,  the  attention 
of  the  reader  was  called  to  the  fact  that  speculators  are 
naturally  bullish,  and  that  the  demand  made  by  them  for 
contracts  is  far  greater  than  the  supply  that  they  bring  into 
existence.  And,  inasmuch  as  the  prices  of  the  actual  com- 
modity sympathize  with  the  prices  of  contracts,  the  princi- 
pal reason  why  organized  speculation  has  a  strong  tendency 
to  put  up  prices  is  made  apparent.  Any  manipulation,  too, 
would  naturally  be  so  conducted  as  to  take  advantage  of 
this  prejudice  of  speculators  for  the  buying  side,  since  it  is 
easier  for  the  market  leaders  to  utilize  prejudices  which 
already  exist  than  to  create  new  ones. 

This  enormous  net  demand  made  by  buyers  upon  the 
speculative  markets  is  increased  by  the  fact  that  sellers 
must  make  some  deliveries,  and  that  the  numerous  corners 
and  squeezes  and  fears  of  the  same  cause  the  shorts  to 
make  purchases  of  the  actual  commodity  and  place  it  in 
store  where  it  may  be  used  for  delivery,  and  that  a  certain 
amount  is  thus  held  from  augmenting  the  supply  of  the 
actual  commodity  for  consumption.  Furthermore,  the 
short  contract  is  one  which  makes  a  trader  who  enters  into 
it  exceedingly  nervous  and  apprehensive,  and  the  shorts 
are  always  taking  alarm  and  bidding  up  prices.  These  fre- 
quent alarms  with  covering  of  shorts  cause  most  of  the 
numerous  sharp  rises  upon  the  exchanges;  and  occasionally, 
the  bullish  manipulation  becomes  so  rampant  that  the 
shorts  are  forced  to  cover  at  considerable  loss  in  a  squeeze 
or  corner. 

It  is  also  to  the  interest  of  brokers  that  prices  be  moving 
upward,  as  advancing  markets  mean  large  trading  and  spec- 
ulation with  numerous  commissions;  and  their  circulars, 
personal  solicitation,  and  advice  help  to  increase  the  specu- 
lative excitement  and  advances  in  price.  Any  tendency  to 
artificial  prices  should  be  deprecated;  nevertheless,  it  may 
be  noted  that  speculation  in  agricultural  products  has 


94          VALUE  OF  ORGANIZED  SPECULATION 

served  to  make  a  demand  for  the  same  and  has  given  higher 
prices  for  commodities  which  could  be  produced  to  advant- 
age in  this  country.  Furthermore,  the  stock  exchanges  have 
helped  greatly  in  financing  the  construction  of  our  railroads 
and  other  industrial  enterprises,  as  they  have  not  only  re- 
duced the  cost  of  marketing,  but  have  also  enabled  promo- 
ters to  place  the  stocks  at  good  prices  upon  the  exchange. 

The  Complication  of  Prices  —  A  General  View 

As  stated  when  the  discussion  of  the  price  tendencies  en- 
gendered by  organized  speculation  was  begun,  there  are 
three  such  tendencies  which  are  more  important  than 
others  and  these  have  consequently  been  selected  for  par- 
ticular description  and  comment.  These  tendencies,  how- 
ever, shade  into  one  another  so  imperceptibly  that  it  is  dif- 
ficult to  summarize  or  define  them.  Though  one  or  another 
of  the  numerous  factors  may  assume  such  importance  as  to 
be  called,  for  the  time,  the  predominating  one,  yet  the  situ- 
ation is  continually  shifting  in  such  a  way  as  to  render  it 
impossible  to  make  any  accurate  description  by  the  easy 
method  of  using  set  rules  and  sweeping  statements.  The 
only  method  possible  is  the  one  here  followed  —  to  describe 
the  action  of  the  principal  factors  separately,  remember- 
ing that  the  combinations  that  present  themselves  are  in- 
finite in  their  number  and  variety. 

Perhaps  the  complexity  of  price-making  may  best  be 
illustrated  by  a  comparison  to  the  ocean  and  the  law  and 
lack  of  law  which  govern  its  movements.  The  ocean  has  its 
currents,  which  follow  their  course  notwithstanding  the 
disturbing  influences  which  always  assert  themselves.  Any 
given  portion,  as  a  cubic  yard,  is  acted  upon  by  different 
forces  at  the  same  time.  The  cubic  yard,  taken  as  an  illus- 
tration, may  form  part  of  the  water  in  a  great  current  which 
can  be  charted  and  will  always  follow  its  regular  course; 
but  this  portion  of  the  water,  while  moving  in  the  current 
can  be  affected  by  forces  which  are  irregular  in  their 


THE  EFFECT  UPON  PRICES  95 

action,  such  as  those  causing  the  waves  and  minor  move- 
ments. Furthermore,  there  are  tides  which  elevate  a  part 
of  the  mass  of  the  ocean  and  then  allow  it  to  fall  back  to  the 
general  level. 

There  are  many  movements  other  than  the  three  just 
mentioned  observable  in  large  bodies  of  water,  and  we  can 
scarcely  conceive  of  the  complexity  of  the  results  of  the 
various  forces  involved.  But  the  factors  to  be  observed 
upon  a  speculative  exchange  are  fully  as  numerous  and 
complicated  as  those  to  be  seen  in  the  ever-changing  ocean. 
In  the  same  way  that  a  particular  quantity  of  water  in  the 
ocean  is  acted  upon  by  different  forces  at  the  same  time,  so 
it  is  with  prices  in  the  economic  field.  They  are  the  result 
of  many  forces  simultaneously  acting  in  quite  different 
directions. 

The  currents  of  the  ocean  which  serve  to  adjust  its  mass 
to  important  underlying  conditions  may  be  compared  to 
the  movements  of  prices  described  above,  in  which,  by  the 
action  of  organized  speculation,  the  wide  variations  in  value 
seen  outside  the  exchanges  are  avoided. 

The  waves  upon  the  surface  of  the  ocean  can  be  com- 
pared to  the  numerous  minor  movements  of  prices  due  to 
exchange  trading,  which  disturb  the  course  of  trade  super- 
ficially, but  have  little  effect  upon  its  deeper  movements. 

The  tides,  which  at  certain  times  elevate  part  of  the  sur- 
face of  the  ocean,  can  be  compared  to  that  tendency  in  ex- 
change markets  which  elevates  the  prices  of  commodities 
and  securities  above  the  level  that  they  would  otherwise 
seek. 

The  illustrations  are  given  because  there  are  those  who 
find  it  difficult  to  understand  how  it  is  that  prices  can  have 
a  tendency  upward  and  one  downward  at  the  same  time, 
and  how  it  is  that  a  certain  commodity  can  be  in  the  midst 
of  a  bull  movement  which  may  last  for  years,  and  yet  be 
subject  to  downward  fluctuations  from  causes  which  lie  only 
on  the  surface. 


96         VALUE  OF  ORGANIZED  SPECULATION 

If  the  bull  and  bear  tendencies  which  exert  themselves 
at  a  particular  time  were  capable  of  being  reduced  to  fig- 
ures which  could  be  put  upon  the  pages  of  a  ledger,  the  bull 
agencies  being  put  upon  the  credit  side,  let  us  say,  and  the 
bear  agencies  upon  the  debit  side,  and  if  the  net  resultant 
of  the  bull  and  bear  agencies  could  be  ascertained  by  strik- 
ing a  balance  in  the  same  way  as  from  a  ledger,  then  the 
manner  in  which  the  different  opposing  forces  act  could  be 
readily  understood.  It  is  because  of  the  common  assump- 
tion that  there  can  be  only  one  economic  factor  which  af- 
fects prices  that  the  general  misconception  arises. 

Summary  of  the  Three-Price  Tendencies 

The  actions  of  traders  upon  an  exchange  are  the  reflec- 
tion of  their  psychological  state,  and  therefore  their  weak- 
nesses and  foibles  must  be  frankly  recognized.  Frequently 
they  are  rash,  but  at  other  times  timid.  Now  they  are 
rushing  in  with  all  the  assurance  of  amateurs;  now  they  are 
running  with  terror  because  of  some  bogey  set  up  to  frighten 
them.  Their  fickle  nature  is  thus  seen  in  the  fact  that  they 
are  always  causing  the  eccentric  minor  fluctuations  which 
are  characteristic  of  the  exchange  markets. 

The  hopefulness  of  traders  is  shown  in  the  tendency  of 
the  market  to  rise  whenever  any  excuse  can  be  given  for  a 
bull  movement;  while  the  fact  that  sound  common  sense 
and  an  accurate  summing-up  of  values  govern  those  who, 
by  the  law  of  the  survival  of  the  fittest,  control  prices  in  the 
long  run,  is  seen  when  we  realize  that  exchange  trading,  in- 
stead of  causing  wide  movements  of  price,  tends,  quite  to 
the  contrary,  to  keep  the  market  within  bounds. 

There  are  many  fallacies  which  frequently  occur  in  the 
discussion  of  the  effect  of  exchange  trading  upon  prices; 
and  in  the  next  chapter  the  principal  ones  will  be  consid- 
ered, especially  the  widely  prevailing  and  unfortunate  fal- 
lacy that  short  selling  tends  to  put  prices  down. 


CHAPTER  III 

PRICES  (continued)  —  SOME  FALLACIES  CONSIDERED 

IN  order  to  arrive  at  a  correct  estimate  of  the  value  of  or- 
ganized speculation,  it  seemed  necessary  to  review  in  some 
detail  the  principal  tendencies  which  make  toward  advanc- 
ing prices  and  which  would  result  in  an  indefinite  advance 
if  it  were  not  for  the  factors  previously  enumerated  which 
keep  the  market  within  bounds. 

It  is  to  be  regretted  that  this  question  is  seldom  dis- 
cussed from  the  standpoint  of  the  moral  and  social  welfare 
of  the  community,  but  that  the  arguments  used  pro  and 
con  usually  refer  to  the  effects  upon  prices.  It  is  further  to 
be  regretted  that  the  arguments  upon  the  effects  of  such 
speculation  are  but  too  frequently  the  mere  offhand  de- 
clarations of  persons  who  have  given  the  subject  the  most 
insufficient  study.  At  times  of  declining  prices  the  anti- 
optionist  is  full  of  assurance  in  attributing  all  declines  to 
the  action  of  organized  speculation;  and  in  his  breezy  man- 
ner, he  even  attributes  the  declines  in  the  prices  of  com- 
modities not  traded  in  on  the  speculative  markets  to  the 
same  cause.  But  his  opponents  have  an  arsenal  of  facts 
behind  them,  and  often  get  the  ear  of  the  public  when  they 
show  the  tendency  of  all  exchanges  to  manipulate  prices 
upward. 

When  commodities  are  advancing  in  price,  however,  the 
anti-optionists  have  an  easier  task.  In  such  case  they 
quickly  shift  their  ground,  and  stoutly  maintain,  for  the 
time  at  least,  that  organized  speculation  tends  to  put  up 
prices.  To  prove  this,  they  have  only  to  refer  to  the  numer- 
ous speculative  booms  with  occasional  corners  and  squeezes 
of  the  shorts  as  recorded  in  the  newspapers,  events  which 


98          VALUE  OF  ORGANIZED  SPECULATION 

naturally  strike  the  popular  imagination.  In  1909  a  news- 
paper controversy  took  place  between  Secretary  of  Agri- 
culture Wilson  and  James  A.  Patten,  of  the  Chicago  Board 
of  Trade,  in  which  Mr.  Patten  was  accused  of  manipulating 
prices  upward.  To  this  charge  he  retorted  that  he  merely 
acted  in  board  of  trade  operations  as  any  merchant  who 
anticipates  price  movements  of  any  commodity  by  buy- 
ing when  prices  are  low  and  selling  when  they  are  high. 
While  expressing  no  opinions  as  to  the  merits  of  this  parti- 
cular controversy,  it  is  brought  to  mind  merely  to  show  how 
the  exchange  trader  is  called  upon  first  to  answer  to  the 
charge  that  he  is  putting  prices  down  and  then  that  he  is 
putting  them  up. 

As  regards  securities,  their  owners  are  of  course  anxious 
that  they  should  advance  in  price,  and  the  promoters  and 
manipulators  are  especially  glad  to  see  high  values  for  the 
securities  that  they  are  selling.  It  is  to  the  interest  of  in- 
tending investors,  however,  that  stocks  fall  to  such  a  figure 
that  they  will  pay  a  good  income  upon  the  market  price. 
But  a  trader  who  thinks  well  of  stocks  is  only  too  likely  to 
invest  all  the  quicker  if  they  are  advancing,  and  then  he 
joins  the  ranks  of  those  who  are  working  for  higher  prices. 
Thus  the  interests  of  the  financiers  who  float  stocks  are  so 
apparent,  their  holdings  awaiting  digestion  are  so  well 
known,  and  they  are  so  prominent  as  leaders  of  the  stock 
market,  that  even  sophists  seldom  accuse  them  of  seeking  a 
decline. 

But  speculative  commodities  are  not  usually  produced  by 
leaders  of  the  market.  On  the  contrary,  they  are,  with  few 
exceptions,  agricultural  products;  and,  to  the  farmers  who 
grow  these  crops,  the  distant  exchange  in  the  city  may 
easily  appear  as  the  cause  of  any  unsatisfactory  prices 
that  he  receives.  This  jealousy  and  misunderstanding  of 
the  farmer  is  augmented  by  other  jealousies  in  different 
elements  of  the  business  community;  for,  as  explained  else- 
where in  this  essay  under  the  heading  of  "  Monopoly,"  the 


PRICES  — SOME  FALLACIES  CONSIDERED       99 

speculative  element  upon  the  exchanges  is  different  from 
the  controlling  interests  in  the  world  of  general  trade  and 
industry.  These  ill-mated  commercial  forces  appear  to 
work  in  harmony,  it  is  true,  but  their  cooperation  is  ficti- 
tious and  more  apparent  than  real.  The  speculative  ex- 
changes in  then-  present  imperfect  state  seem  to  bring  for- 
ward their  most  repulsive  aspects;  while  only  the  attentive 
student  of  economics  can  see  their  beneficent  effects  upon 
commerce,  or  the  great  good  to  the  community  which  they 
are  likely  to  accomplish  in  the  process  of  evolution. 

Hence  it  is  that  practical  men  look  askance  upon  spec- 
ulation on  the  exchanges,  and  all  interests  are  ready  to 
make  it  the  scapegoat  for  any  movement  of  prices  which  is 
not  satisfactory.  It  so  happens  that,  among  the  laity,  and 
even  to  some  extent  among  professional  economists,  the 
idea  that  high  prices  are  good  of  themselves  widely  prevails ; 
and  it  is  therefore  quite  natural  that  the  exchanges  should 
be  called  upon  to  bear  the  brunt  of  the  adverse  criticism 
for  declines  in  price.  Even  those  who  would  benefit  by 
lower  prices  are  quite  ready  to  cater  to  popular  prejudice 
and  accuse  organized  speculation  of  depressing  values; 
while  politicians  see  few  votes  that  can  come  from  brokers 
or  their  employees  and  many  that  come  from  those  who 
do  not  understand  exchange  operations. 

In  the  first  part  of  the  decade  beginning  with  1890,  these 
different  interests  undertook  a  legislative  campaign  against 
organized  speculation  which  was  based  almost  entirely  upon 
the  alleged  tendency  of  exchange  dealings  to  lower  prices. 
The  different  proposed  laws  introduced  into  Congress  were 
principally  directed  towards  curtailing  short  selling,  as  it 
was  thought  that  this  practice  was  the  cause  of  the  low 
prices  that  prevailed  at  the  time.  Also,  in  more  recent 
years,  similar  legislation  has  been  sought,  directed  in  most 
cases  against  speculation  in  cotton.  In  the  printed  reports 
of  hearings  before  different  committees  in  regard  to  the 
proposed  legislative  measures,  there  can  be  found  perhaps 


100        VALUE  OF  ORGANIZED  SPECULATION 

more  fallacies  than  in  any  other  collection  of  economic 
writings.  There  appeared  before  the  committees  men  who 
knew  how  to  grow  crops,  to  mill  wheat,  to  spin  cotton,  and 
to  pack  pork,  but  who  knew  nothing  of  commerce  in  its 
broader  sense  or  of  the  general  conditions  that  make  prices. 

The  Underlying  Fallacy 

The  fallacy,  which  underlies  most  of  the  arguments 
of  those  who  hold  that  organized  speculation  puts  down 
prices,  arises  from  fixing  the  attention  upon  the  short  seller 
and  his  sales,  at  the  same  time  forgetting  or  minimizing  the 
fact  that  the  net  tendency  of  the  exchanges  is  to  encourage 
buying  and  thus  to  furnish  a  speculative  demand.  The 
bear  is  seen  offering  to  sell  a  commodity  for  future  delivery; 
and  his  offerings  appear,  for  the  present,  at  least,  to  be  as 
potent  as  a  supply  of  the  actual  commodity;  but  the  specu- 
lative buyer  is  not  seen,  as  he  bids  for  even  greater  quanti- 
ties of  "wind,"  which  demand  more  than  counterbalances 
the  offerings  of  the  short  seller. 

It  would  seem  as  though  every  form  of  human  ingenuity 
were  exhausted  in  the  effort  to  prove  that  the  seller  has 
more  effect  upon  the  market  than  the  purchaser.  For  in- 
stance, it  is  said  that,  when  a  short  seller  of  wheat  buys  it 
in,  such  a  purchase  does  not  have  as  much  effect  as  the  orig- 
inal sale,  because  the  purchase  is  usually  made  from  some 
other  short  seller.  But  this  argument  is  clearly  a  fallacy,  and 
could  just  as  well  be  applied  to  the  long  side  of  the  market. 
Thus  it  could  be  said,  when  the  long  buyer  sold  out  his  con- 
tract, that  in  many  cases  he  would  be  merely  selling  to  an- 
other purchaser  of  a  long  contract.  If  the  same  species  of 
reasoning  were  resorted  to  as  in  the  other  case,  the  supply 
which  leads  to  this  sale  would  appear  to  have  no  effect. 
Arguments,  however,  should  be  such  that  they  will  work 
either  way. 

Probably  it  is  due  to  the  idiom  of  our  speech  that  there  is 
so  much  fallacious  writing  and  thinking  upon  this  subject. 


PRICES  —  SOME  FALLACIES 


When  a  trade  is  effected  in  which  one  dealer  buys  a  com- 
modity which  another  sells  to  him,  the  transaction  is  called 
a  purchase,  if  viewed  from  the  standpoint  of  the  buyer,  or 
a  sale,  if  viewed  from  the  standpoint  of  the  seller.  And 
transactions  upon  a  commercial  exchange  are  referred  to  as 
"sales,"  perhaps  because  such  an  exchange  is  considered 
as  a  place  to  market  or  sell  commodities.  If  it  were  our  cus- 
tom to  say,  for  instance,  that  there  were  transactions  in  so 
many  bushels  of  grain  upon  the  board  in  such  and  such  a 
time,  many  fallacies  would  be  avoided.  But  in  common 
speech  the  word  transaction  is  not  used  in  the  above  con- 
nection; for,  if  one  trader  bought,  and  another  sold,  a  mil- 
lion bushels,  the  common  way  of  narrating  the  occurrence 
would  be  to  say  that  there  was  "  a  sale  "  of  a  million  bushels, 
thus  fixing  upon  the  mind  the  idea  that  this  grain  was  sold 
and  ignoring  the  fact  that  it  was  also  bought. 

The  business  man  knows  business,  because  it  is  to  prob- 
lems in  the  field  of  trade  that  he  devotes  himself;  and,  for 
the  same  reason,  he  does  not  usually  understand  the  nice- 
ties of  language.  Hence  it  is  quite  possible,  by  fixing  his 
attention  upon  the  sale  side  of  a  bargain,  to  convey  the  im- 
pression that  a  sale  does  not  necessarily  imply  a  purchase. 
This  obliquity,  due  to  lack  of  scientific  training  in  the  con- 
sideration of  economic  problems  and  to  lack  of  practice  in 
writing  and  speaking  on  such  subjects,  leads  to  fallacies  in 
different  departments  of  economics,  particularly  in  discuss- 
ing the  tariff,  but  also  in  considering  this  question  of  trans- 
actions upon  commercial  exchanges.  Hence  we  find  it 
stated  over  and  over  again,  in  the  different  writings  upon 
the  subject,  that  sales  depress  prices;  that  so  much  of  a 
commodity  has  been  sold  upon  an  exchange,  and  hence, 
so  some  of  the  writers  say,  any  one  with  common  sense  can 
see  that  these  sales  must  have  their  depressing  effect. 

It  might  be  that  buyers  were  bidding  desperately  in  the 
midst  of  a  corner;  it  might  be  that  enormous  quantities 
were  being  eagerly  bought  in  response  to  exaggerated  news 


OF  ORGANIZED  SPECULATION 

sent  out  by  speculators,  and  that  excitement  had  been 
worked  to  a  tremendous  pitch  of  recklessness  by  the 
methods  of  the  speculative  exchanges;  yet  those  persons 
who  fall  a  victim  to  the  above-mentioned  peculiarity  of  lan- 
guage would  refer  to  these  transactions,  in  which  the  eager- 
ness of  the  buyers  is  so  conspicuous,  as  so  many  "sales"  of 
the  commodity,  which,  so  they  reason,  will  depress  the 
price. 

It  is  not  meant  herein  to  imply  that  either  the  purchase 
or  the  sale  is  of  itself  the  determining  factor.  On  the  con- 
trary, it  is  the  demand  which  leads  up  to  the  purchase  and 
the  supply  that  leads  to  the  sale  which  cause  fluctuations 
in  price.  The  actual  purchase  and  sale,  or  in  other  words 
the  transaction,  is  but  the  seal  which  is  put  upon  the  condi- 
tion of  the  minds  of  buyers  and  sellers  at  a  particular  mo- 
ment, showing  that  the  demand  represented  by  a  buyer 
and  the  supply  represented  by  a  seller  have  been  merged  in 
a  transaction.  The  movements  of  prices  are  to  be  deter- 
mined by  analyzing  the  effect  of  demand  and  supply  in  the 
different  circumstances  found,  not  by  considering  the  sell- 
ing side  only  and  then  calling  a  transaction  a  sale. 

Selling  Four  Times 

The  writer  who  perhaps  has  carried  to  the  farthest  limit 
the  idea  that  a  sale  does  not  imply  a  purchase  is  Charles  W. 
Smith,  of  Liverpool,  England.  In  most  respects  he  agrees 
with  others  who  attack  future  selling;  but  his  favorite  doc- 
trine appears  to  be  that,  under  the  future  system,  the  crop 
is  sold  four  times.  Perhaps  an  excerpt  from  his  writings  will 
best  illustrate  how  it  is  that  the  anti-optionists  continually 
ignore  the  fact  that  purchases  may  be  made  of  future  con- 
tracts as  well  as  sales.  In  discussing  the  possible  introduc- 
tion of  the  future  system  into  the  market  for  fruit,  Mr. 
Smith  says:  "Instead  of  one  crop  of  fruit  being  sold  or  fore- 
stalled, there  would  be  four  crops  of  fruit  made  out  of  the 
one.  For  example  —  first,  the  actual  crop  would  be  fore- 


PRICES  — SOME  FALLACIES  CONSIDERED      103 

stalled  by  the  sale  of  a  Future  to  a  speculator;  secondly, 
there  would  be  the  resale  of  this  Future;  thirdly,  there 
would  be  the  unlimited  crop  sold  by  bears,  etc.;  fourthly, 
there  would  be  the  actual  crop  itself  sold  to  the  consumer."1 

But  Mr.  Smith  might  just  as  well  have  called  attention 
to  the  fact  that  some  parcels  of  a  commodity  traded  in  upon 
the  exchanges  are  sold  hundreds  of  times.  If  one  wishes  to 
avoid  fallacy  in  this  respect  he  has  but  to  remember  that, 
for  every  time  a  commodity  is  sold,  it  has  also  been  bought. 
Thus,  in  the  case  supposed  in  the  excerpt,  when  the  pro- 
ducer sells  his  crop  in  advance  to  a  speculator,  the  crop  is 
bought  at  the  same  time  that  it  is  sold,  and  this  purchase 
may  be  on  terms  very  favorable  to  the  seller.  For,  when  a 
purchaser  buys  in  advance  in  this  way,  he  does  it,  in  many 
cases,  because  he  is  anxious  to  obtain  a  supply;  and,  when 
he  buys  under  such  pressure,  an  excellent  price  is  often  ex- 
acted. In  the  second  transaction,  when  the  speculator 
closes  his  future  contract,  this  sale  would  have  no  more 
effect  than  his  former  purchase;  and,  under  the  future  sys- 
tem, there  is  great  buying  power,  in  that  speculators  are 
always  entering  the  market  and  frequently  are  ready  to  re- 
lieve any  tired  trader  of  his  load.  As  regards  the  third  sale, 
"the  unlimited  crop  sold  by  bears,"  there  is  to  set  against 
it  the  "unlimited"  crop  purchased  by  the  bulls  on  future 
contracts.  The  fourth  sale,  where  the  actual  crop  is  sold 
to  a  consumer,  would  need  to  be  made  in  any  case;  and, 
when  it  is  made,  there  will  necessarily  be  a  purchase  of  the 
same. 

The  important  question  is :  Does  the  introduction  of  the 
system  of  organized  speculation  add  to  the  efficient  demand 
or  does  it  add  to  the  efficient  supply?  The  only  answer 
that  can  be  given  is  that  both  are  enormously  increased. 
The  contracts  manufactured  upon  the  speculative  ex- 
changes have  much  the  same  effect  as  an  increase  in  the 
supply  of  the  actual  commodity,  inasmuch  as  spot  prices 
1  Smith,  Commercial  Gambling,  p.  131. 


104        VALUE  OF  ORGANIZED  SPECULATION 

tend  to  follow  the  price  of  contracts.  But  the  demand  for 
these  manufactured  contracts  comes  largely  from  ex- 
change traders  and  is  equally  efficient  in  affecting  the 
price  of  the  cash  commodity.  Hence  the  problem  assumes 
the  form  of  comparing  the  relative  strength  of  the  two  con- 
flicting determinants.  Having  brought  the  discussion  to 
this  point,  there  is  one  overshadowing  consideration  to  be 
kept  in  mind:  "The  public  are  always  bulls."  This  state- 
ment of  the  attitude  of  the  great  mass  of  speculators  is  only 
slightly  exaggerated,  and  is  admitted  and  emphasized  by  all 
market  students.  This  enormous  demand  of  the  public  is 
attracted  to  the  speculative  markets  by  the  machinery  of 
organized  speculation;  and  it  constitutes  a  buying  power 
which  even  the  great  market  leaders  find  it  more  profitable 
to  encourage  than  to  oppose. 

The  Offers  to  sell 

There  are  many  different  ways  of  stating  and  varying  the 
argument;  frequently  the  anti-optionists  argue  that  it  is 
not  so  much  the  amount  of  sales  actually  made  as  it  is  the 
offers  to  sell  which  affect  prices;  further,  they  say  that  the 
offers  are  limitless  and  that  it  requires  little  or  no  capital  to 
make  them.  It  is  difficult,  however,  for  any  one  who  keeps 
his  head  in  such  a  controversy  to  understand  how  offers  to 
sell  can  be  made  any  more  readily  than  bids  for  the  pro- 
perty. 

If  the  observer  stands  near  the  wheat  pit,  he  will  hear 
numerous  offers  to  sell,  so  numerous  that  they  appear  al- 
most illimitable;  and  the  offers  which  are  not  accepted  are 
much  more  numerous  than  those  which  issue  in  a  contract. 
But,  on  the  other  hand,  a  listener  will  hear  many  bids, 
which  are  just  as  numerous  on  the  average  as  the  offers  to 
sell.  It  should  be  remembered,  of  course,  that  purchases 
may  be  made  upon  the  margin  system  as  well  as  sales,  and 
a  given  amount  of  money  goes  just  as  far  in  margining  a 
buyer  of  futures  as  it  does  a  seller;  and  the  intending  buyer 


PRICES  — SOME  FALLACIES  CONSIDERED     105 

has  equal  facilities  for  making  numerous  bids,  which  may 
affect  the  market  just  as  powerfully  as  the  offers  to  sell. 

Philanthropy 

Another  argument,  frequently  made  to  prove  that  there 
is  some  way  by  which  the  short  sellers  can  get  out  of  their 
contracts  without  making  a  demand  for  the  commodity,  is 
that  it  is  imposssible  for  them  to  buy  enough  of  it  to  make 
deliveries  upon  the  enormous  amount  of  short  contracts 
open,  and  hence  the  buyer  allows  them  to  settle  at  a  low 
price.  If  the  disposition  of  the  long  holders  of  contracts 
were  as  above  stated,  the  conclusion  would  readily  follow. 
But,  like  many  another  false  argument,  the  premises  are 
wrong;  and  the  fact  that  a  philanthropic  disposition  is  at- 
tributed to  the  long  holders  shows  an  utter  failure  to  under- 
stand human  nature  as  exhibited  on  a  speculative  exchange. 

The  speculators  upon  the  Chicago  market,  and  on  other 
markets,  are  made  of  sterner  stuff.  Instead  of  making  an 
easy  settlement  with  a  trader  who  cannot  fulfill  his  con- 
tracts, their  settlements  are  hard,  indeed;  and,  furthermore, 
they  use  every  means  in  their  power  to  make  delivery  diffi- 
cult if  not  impossible.  This  effort  is  one  cause  of  the  numer- 
ous corners  and  squeezes.  If  manipulators  are  attempting  a 
corner  in  wheat,  for  example,  they  will  send  men  into  the 
country  to  buy  all  that  they  can  from  the  farmers  who  own 
grades  that  might  possibly  be  delivered.  They  will  then 
send  this  wheat  out  of  the  country  or  fill  the  elevators  with 
it;  and  while  they  are  doing  everything  that  they  can  to 
make  the  performance  of  the  contracts  by  the  bears  im- 
possible, they  will  bid  for  the  wheat  in  the  pit  in  the  effort 
further  to  raise  the  price.  Why  would  they  do  these  things 
if  they  were  willing  to  let  the  bears  settle  on  favorable 
terms?  The  spirit  with  which  they  act  is  of  just  the  oppo- 
site nature.  Their  effort  is  to  corner  or  squeeze  the  bears, 
and  they  have  no  mercy. 

It  is  true  that  when  a  trader  finds  himself  cornered  and 


106        VALUE  OF  ORGANIZED  SPECULATION 

knows  that  there  will  be  much  expense  in  getting  the  wheat 
to  make  delivery,  he  will  go  to  the  cornerer  and  ask  for  a 
settlement.  This  will  usually  be  granted,  not  through  phil- 
anthropy or  pity;  but  because  the  cornerer  does  not  want 
to  make  himself  unpopular  with  his  fellow  members,  and 
because  he  does  not  wish  to  make  the  price  of  the  commo- 
dity so  high  that  the  most  extraordinary  efforts  will  be 
made  to  bring  it  in,  and  also  because  —  especially  in 
recent  years  —  there  have  been  rules  adopted  on  the 
exchanges  which  render  corners  and  manipulations  more 
difficult.  Yet  even  this  settlement  is  granted  in  about  the 
same  spirit  with  which  a  successful  gambler  gives  a  victim 
enough  money  to  take  him  home.  It  is  not  done  because  it 
is  impossible  to  make  delivery,  but  for  quite  different  rea- 
sons; principal  among  which  is  the  fear  that,  if  settlement 
be  not  made,  the  commodity  will  be  brought  in  from  the 
country  or  from  other  cities.  Of  course,  in  case  of  a  corner, 
the  farmers  do  often  sell  at  high  prices;  but  that  is  not  what 
the  cornerer  desires,  and  he  prevents  it  whenever  he  can. 

In  some  instances,  however,  when  the  situation  appears 
to  be  well  in  hand,  he  will  refuse  to  settle.  A  corner  in  corn, 
which  occurred  some  years  ago,  is  called  to  mind  in  which 
the  cornerers  said  to  those  who  wished  to  settle,  "  Go  into 
the  pit  and  buy  the  corn.  We  are  not  running  this  deal 
through  philanthropy."  The  spirit  with  which  the  trader 
does  business  is  much  the  same  in  the  case  just  given  as  in 
the  case  where  he  permits  his  victim  to  settle.  The  cornerer 
simply  wishes  to  get  the  price  of  the  commodity  just  high 
enough  so  that  the  belated  short  will  buy  of  him,  and  yet 
not  high  enough  to  warrant  the  trouble  and  expense  of 
going  to  others  to  get  the  commodity. 

When  a  trade  is  canceled  by  the  process  of  ringing  out, 
as  it  is  called,  or  through  any  clearing-house  or  settlement 
system,  it  is  an  evidence,  not  that  the  closing  of  a  trade  is 
impossible,  but  that  the  cornerer  knows  that  it  is  possible 
to  do  it  otherwise.  For,  if  he  could  prevent  others  from 


PRICES  — SOME  FALLACIES  CONSIDERED     107 

selling  the  commodity,  and  if  he  were  not  ready  to  sell  it 
himself,  he  would  let  those  who  are  being  cornered  keep  on 
bidding  in  the  pit,  so  that  the  price  would  be  raised  higher 
and  higher,  which  is  exactly  what  the  cornerer  wishes. 

The  Payment  of  Differences 

In  connection  with  the  fallacy  just  discussed,  another  is 
frequently  heard,  to  the  effect  that  when  a  contract  to  buy 
and  one  to  sell  are  set  off  against  each  other  and  settled  by 
the  payment  of  differences,  the  purchase  contract  in  such 
a  case  has  no  effect  in  raising  price.  The  most  sensational 
conclusions  are  reached  by  this  species  of  reasoning.  It  is 
said,  for  example,  that  millions  of  bushels  of  wheat  are 
thrown  on  the  market  greatly  depressing  the  price;  that 
this  wheat  is  never  bought  back,  as  it  is  settled  by  the  pay- 
ment of  differences ;  and  that  therefore  the  idea  that  every 
sale  implies  a  purchase  is  negatived. 

The  answer  to  such  an  argument  is,  that,  in  the  case  sup- 
posed, there  is  obviously  important  pressure  to  buy,  and 
that  the  amount  paid  is  in  effect  the  difference  between  the 
previous  sale  and  a  present  unfavorable  purchase.  If  per- 
sistent demand  be  thus  settled,  it  can  hardly  be  said  that 
it  has  no  effect.  When  a  short  sale  has  reached  the  books 
of  a  clearing-house  which  clears  commodities,  however, 
there  is  no  way  to  get  it  canceled  except  to  make  delivery 
or  else  set  it  off  against  a  purchase.  But  to  argue  that  the 
purchase  in  such  a  case  has  no  effect  is  about  as  absurd  as  it 
would  be  to  say  that  a  credit  of  a  certain  amount  on  a 
ledger  has  no  effect  because  perchance  the  account  may  bal- 
ance. If  some  method  be  found  whereby  a  purchase  can  be 
checked  off  against  a  sale,  then  these  two  opposing  tenden- 
cies counterbalance  each  other.  The  book-keeping  opera- 
tion has  no  effect  either  way,  except  that  a  demand  for  a 
certain  amount,  and  the  supply  for  a  certain  amount,  have 
been  taken  off  the  market. 

Referring  to  accountancy,  let  us  consider  a  slightly  dif- 


108        VALUE  OF  ORGANIZED  SPECULATION 

ferent  example  from  that  given  above.  Let  us  suppose  a 
customer  is  charged  $10  on  a  ledger  and  afterwards  pays 
$10  in  cash.  The  account  is  now  in  balance  and  the  book- 
keeper rules  it  up.  Would  it  not  be  absurd  for  the  cus- 
tomer to  undertake  then  to  argue  that  the  $10  he  paid  had 
no  effect  because  it  only  went  to  counterbalance  the  pre- 
vious charge  of  $10?  Or,  supposing  that  a  pound  of  flour 
is  on  one  side  of  a  scale  and  a  pound  weight  on  the  other 
side,  would  it  not  be  absurd  to  argue  that  the  gravity  of  the 
flour  had  no  effect  because  the  scales  were  in  balance?  It 
is  the  same  in  a  market  where  a  demand  for  a  certain 
amount  and  a  supply  for  a  like  amount  are  set  off  against 
each  other  by  a  system  of  accounts.  Each  has  its  effect. 
The  supply  is  diminished,  and  the  demand  is  diminished, 
in  like  degree. 

The  Interest  of  the  Parties 

The  commitments  of  the  different  traders  in  the  market 
are  of  course  important  in  determining  on  which  side  their 
influence  is  to  be  cast.  A  trader  who  is  long  will  naturally 
give  out  bullish  opinions;  and,  if  his  interest  be  large 
enough,  he  will  sometimes  go  to  much  expense  in  order  to 
spread  news  which  favors  higher  prices.  In  the  same 
way,  a  bear,  who  has  committed  himself  to  the  short  side, 
will  naturally  do  all  that  he  can  to  depress  values.  These 
facts  are  called  to  mind  by  the  anti-optionists ;  and  they  also 
point  out  that  the  modern  system  of  organized  speculation 
provides  a  plan  whereby  a  trader  may  have  a  direct  inter- 
est in  depressing  prices. 

But  the  important  consideration  in  this  connection  is, 
that  it  is  impossible  to  provide  opportunities  for  the  large 
number  of  purchasers  brought  into  the  market  by  organ- 
ized speculation  unless  they  be  supplied  by  traders  who  sell 
for  future  delivery.  Estimates  are  repeatedly  being  made 
by  different  parties  showing  the  large  proportion  of  the 
deals  in  organized  markets  which  are  of  a  purely  specula- 


PRICES  — SOME  FALLACIES  CONSIDERED       109 

live  character.  If,  then,  the  buyers  brought  in  by  organ- 
ized speculation  were  confined  to  those  traders  who  had 
the  actual  commodity  to  sell,  they  could  not  make  their 
purchases.  The  comparatively  small  amount  of  the  actual 
commodity  coming  upon  the  market  would  be  quickly  ab- 
sorbed, leaving  the  great  mass  of  intending  purchasers  to 
bid  higher  and  higher  in  the  effort  to  tempt  those  who  had 
bought  earlier  to  part  with  their  holdings. 

A  market  of  this  sort  would  doubtless  be  highly  satisfac- 
tory to  the  producer,  except  for  the  fact  that  the  state  of 
affairs  contemplated  could  be  only  temporary.  As  shown 
heretofore,  purchases  made  purely  for  speculation  must  be 
unloaded  at  some  time,  and  speculators  are  likely  to  tire  of 
their  holdings  very  soon.  When  they  do,  the  effect  of  their 
sales  would  put  the  price  to  the  opposite  extreme  —  even 
to  a  point  below  the  use-value  of  the  property.  Hence  if 
short  sales  in  wheat,  for  instance,  were  abolished,  the  result 
could  be  none  other  than  that  trading  in  that  commodity 
would  be  controlled  by  much  the  same  economic  laws  that 
govern  real  estate  dealings  at  present.  That  is  to  say,  the 
wheat  market  would  be  one  in  which  there  would  be  an 
occasional  tremendous  boom,  perhaps  once  in  fifteen  or 
twenty  years,  and  each  boom  would  soon  be  followed  by  a 
terrible  fall.  After  each  decline  would  ensue  a  long  period 
of  dull  markets  mixed  with  abrupt  or  eccentric  fluctuations. 
But  there  could  not  be  another  extensive  bull  movement 
until,  as  the  real  estate  men  would  express  it,  "another 
crop  of  fools  were  born." 

In  order  that  speculation  may  be  popular  and  continu- 
ous, the  market  must  be  made  broad  enough  so  that  there 
is  opportunity  for  a  great  number  of  traders  on  both  sides. 
Organized  speculation  introduces  this  great  mass  of  trad- 
ing, and  it  overshadows  the  comparatively  small  trade  in 
the  actual  commodities.  As  an  illustration,  let  us  suppose 
a  market  to  which  an  average  amount  of  50,000,000 
bushels  of  actual  wheat  is  brought  every  year  and  sold  to 


110        VALUE  OF  ORGANIZED  SPECULATION 

consumers.  Let  us  further  suppose  that  organized  specula- 
tion be  introduced  into  this  market  with  the  vast  horde  of 
traders  that  go  with  it.  Also,  let  us  make  the  supposition  — 
which  is  entirely  reasonable  —  that  they  furnish  a  demand 
for  500,000,000  bushels  for  purely  speculative  purposes. 
But  ex  hypothesi  there  will  be  only  50,000,000  bushels 
which  reach  that  particular  market  in  the  whole  year. 
How,  then,  are  these  prospective  purchasers  to  be  accom- 
modated? They  would  quickly  buy  the  50,000,000  of  actual 
wheat  at  an  advanced  price,  and  then  they  would  bid  for 
450,000,000  more  at  a  further  advance,  leaving  those  who 
ordinarily  purchase  the  50,000,000  bushels  for  actual  use  to 
pay  either  a  higher  price  or  seek  some  other  market. 

It  is  readily  seen  from  this  illustration  that  there  is  no 
way  to  accommodate  these  speculative  buyers  of  500,000,- 
000  bushels  of  wheat,  except  by  a  boom  similar  to  those 
which  occur  about  once  in  a  generation  in  the  real  estate 
market,  or  else  by  providing  a  system  whereby  this  im- 
mense demand  may  be  satisfied  by  sales  of  short  wheat. 
Supposing  the  latter  solution  of  the  difficulty  to  be  the  one 
selected,  let  us  note  its  exact  effects.  The  plan  adopted  has 
been  simply  to  introduce  organized  speculation.  The  de- 
mand and  supply  for  the  50,000,000  bushels  of  actual  wheat 
in  this  market  is  not  affected  except  indirectly;  but  the 
demand  for  about  500,000,000  bushels  of  future  wheat  has 
been  satisfied  by  a  supply  of  approximately  the  same 
amount. 

It  is  not  meant  to  argue  that  there  would  be  transactions 
for  exactly  the  amount  mentioned  or  that  the  prospective 
buyers  would  exactly  equal  the  prospective  sellers.  It  is 
merely  intended  to  make  the  supposition  consistent  with 
the  probabilities,  by  assuming  that,  at  the  prices  which 
would  be  likely  to  prevail,  there  would  be  buyers  for 
500,000,000  bushels  of  future  wheat  who  would  be  satisfied 
by  sales  of  an  equal  amount  of  short  contracts.  Or,  the 
supposition  is,  to  use  a  legal  phrase,  that  the  price  would  be 


PRICES  — SOME  FALLACIES  CONSIDERED       111 

such  that  the  minds  of  the  buyers  of  500,000,000  bushels 
and  of  the  sellers  of  the  same  amount  would  meet;  and 
hence  the  clearing-house  would  show  that  there  were 
500,000,000  bushels  of  the  short  wheat  and  the  same 
amount  of  long  contracts. 

The  illustration  given  should  show  the  reader  what 
organized  speculation  will  do  in  such  a  case  as  that  sup- 
posed. It  has  raised  up  buyers  for  500,000,000  bushels  of 
future  wheat  and  sellers  for  the  same  amount;  and  we  are 
now  ready  to  consider  the  question  of  the  interests  which  it 
has  created.  The  anti-optionist  can  see  the  bearish  interests 
of  those  who  have  sold  short  in  the  case  supposed,  but  he 
cannot  see  the  bullish  interest  of  the  buyers  of  the  future 
wheat.  Yet  the  bull  element  introduced  by  organized 
speculation  is  even  more  important  than  the  bear  element 
so  introduced.  This  is  because  speculators  are  naturally 
bullish,  and  more  of  them  seek  to  buy  for  long  account  than 
to  sell  short.  This  added  net  demand  cannot  be  satisfied 
except  by  a  greater  or  less  rise  in  prices.  As  before  ex- 
plained, a  rise  due  to  a  speculative  demand  of  this  charac- 
ter will  be  only  a  temporary  one.  Yet  the  tendency  is  ever 
present,  and  enables  the  producer  to  get  higher  prices  part 
of  the  time  than  he  would  in  case  speculation  were  not  so 
rife. 

At  the  time  when  deals  are  consummated  for  future  de- 
livery, the  amount  of  futures  purchased  must  be  exactly 
equal  to  the  amount  of  futures  sold,  as  the  actual  commod- 
ity does  not  figure  till  the  time  for  delivery  arrives.  Thus, 
in  the  case  supposed  above,  the  demand  for  the  50,000,000 
bushels  of  actual  wheat  and  the  supply  of  the  same  amount 
are  not  affected  by  the  introduction  of  organized  specula- 
tion, except  indirectly  as  prices  may  be  changed  thereby. 
But  as  regards  future  wheat,  the  interest  in  depressing 
prices  of  the  sellers  of  500,000,000  bushels  of  short  wheat 
only  counterbalances  the  interest  of  the  buyers  of  the  same 
in  putting  up  the  price  of  the  500,000,000  bushels  of  long 


112        VALUE  OF  ORGANIZED  SPECULATION 

futures;  and  it  is  a  rank  fallacy  to  suppose  that,  while  the 
sellers  of  a  certain  amount  are  interested  in  a  fall,  the  trad- 
ers who  bought  of  them  are  not  equally  interested  in  a  rise. 

The  Strength  of  the  Parties 

Arguing  further,  the  anti-optionists  call  to  mind  the  fact 
that,  while  the  public  are  usually  bulls,  the  professionals  are 
more  likely  to  be  bears.  Starting  with  these  premises,  they 
argue,  and  with  much  reason,  that  the  bear  side  has  greater 
skill  hi  professional  manipulation  behind  it.  This  argument 
is  no  doubt  the  most  effective  one  which  can  be  offered  in 
support  of  the  doctrine  that  organized  speculation  de- 
presses prices.  Perhaps  the  easiest  way  to  answer  it  is  to 
refer  to  the  comparison  heretofore  made  between  profes- 
sionals making  profits  from  amateurs  in  the  speculative 
markets  and  the  contest  between  the  drover  and  the  lambs 
he  is  driving.  It  would  not  be  wise  in  the  drover  to  attempt 
to  control  the  action  of  the  lambs  in  every  particular.  It  is 
for  his  interest  to  allow  them  some  liberty  to  play  —  some 
freedom  of  action.  If  he  manages  them  in  a  cruel  and  arbi- 
trary manner,  they  will  sicken  and  die,  and  their  carcasses 
will  not  be  as  valuable  as  though  they  were  fattened  for  the 
slaughter.  For  a  similar  reason  the  fisherman  allows  the 
trout  to  play  after  he  has  been  hooked;  and  on  every  hand 
we  see  instances  in  which  those  who  are  sure  of  ultimate 
control  find  it  for  their  interest  to  allow  a  victim  to  have  his 
own  way  for  a  time. 

A  similar  policy  is  advisable  in  the  contest  that  takes 
place  between  the  professionals  and  amateur  speculators, 
who  are  well  named  the  lambs.  The  professional  must  ar- 
range his  campaign  so  that  he  will  ultimately  triumph;  but 
he  must  often  stoop  to  conquer.  Furthermore,  he  is  not 
always  successful  at  first.  The  speculator,  if  he  wishes  to 
be  permanently  successful,  must  adapt  himself  to  changing 
conditions  as  they  are  presented ;  and  he  must  have  infinite 
tact  and  learn  not  to  press  an  advantage  too  far.  The  names 


PRICES  — SOME  FALLACIES  CONSIDERED       113 

of  numerous  speculators  are  called  to  mind  who  were  suc- 
cessful as  bears  for  years  at  a  time,  but  who  ultimately  lost 
all  in  a  prolonged  bull  market.  In  order  to  be  successful, 
therefore,  it  is  necessary  to  conform  most  of  the  time  to  the 
wishes  and  prejudices  of  the  mass  of  speculators,  even 
though  they  may  be  unskilled,  and  carefully  to  select  the 
time  for  opposing  them. 

Obviously,  then,  it  is  the  expedient  policy  of  the  profes- 
sionals to  give  the  amateurs  full  rein,  and  to  encourage 
them  to  speculate  on  the  side  of  the  market  that  they  wish. 
The  professional  is  not  always  a  bear;  it  is  for  his  interest 
part  of  the  time  to  be  a  bull,  and  it  is  especially  for  his 
interest  to  turn  and  be  a  bull  when  the  bear  party  becomes 
too  large.  His  efforts  are  directed  to  persuading  traders  to 
purchase,  and  he  endeavors  to  rush  up  prices  so  that  he  can 
sell  on  the  rise.  This  policy  increases  his  profits  and  makes 
a  top-heavy  market,  which  is  almost  certain  to  go  down 
from  the  liquidation  of  the  numerous  buyers  who  soon  tire 
of  their  holdings. 

It  would  be  extremely  unwise  for  the  market  leader  to 
attempt  to  force  the  prices  of  commodities  below  their  cost 
of  production.  He  could  not  tell  at  what  time  a  rival  man- 
ipulator would  load  up  with  long  stuff  and  then,  perhaps 
taking  advantage  of  some  crop  damage  report  which 
brought  the  public  into  the  market  as  bulls,  would  scare 
bear  traders  into  covering  and  ultimately  ruin  the  bear 
leader  himself.  Such  catastrophes  have  been  known  to 
occur;  and  any  speculator,  even  though  he  have  great 
power  in  the  market,  shows  his  wisdom  by  conforming  to 
the  prejudices  of  the  amateurs  rather  than  in  going  against 
them.  Manipulative  purchases  may  often  be  made  with 
good  chance  of  profit  above  the  legitimate  value  of  a  com- 
modity; but  seldom  or  never  is  it  good  policy  to  make  sales 
below  it. 

In  this  connection  it  is  sometimes  said  that  the  profes- 
sional seller  can  tire  out  the  buyer;  and  hence,  when  the 


114        VALUE  OF  ORGANIZED  SPECULATION 

short  is  covered  and  the  long  liquidated,  it  will  be  at  a  low 
price.  Considering  only  the  question  of  capital,  it  is  no 
doubt  true  that  the  professional  has  greater  strength  than 
the  outside  speculator,  and  has  enough  money  to  margin 
a  deal  farther  if  he  wishes  to.  But  there  are  other  consider- 
ations which  make  it  bad  policy  for  the  bear  to  protect  a 
selling  contract  indefinitely.  Indeed,  the  right  to  deliver  a 
commodity  at  a  certain  time  can  hardly  be  made  as  an 
investment  or  so  considered. 

The  expression  "investment  seller"  has  been  coined,  but 
one  can  scarcely  hear  it  mentioned  without  a  smile;  and  it 
seems  almost  incongruous  to  consider  such  a  mere  contract 
to  deliver  as  property  of  any  sort.  Looking  at  a  trader  who 
considers  a  short  sale  as  a  kind  of  investment,  the  fact 
might  be  noted  that  the  short  seller  of  stocks  is  not  obliged 
to  pay  interest,  but  he  must  pay  any  dividends  declared  on 
the  stock  that  he  has  sold.  In  grain  and  other  commodities 
the  short  seller  can  usually,  in  case  there  is  a  large  stock  of 
the  commodity  on  hand,  transfer  from  one  option  to  an- 
other at  an  advanced  price,  and  thus  make  the  carrying 
charges.  In  some  years  these  carrying  charges  have  been  so 
large  that  many  have  made  an  excellent  income  by  thus 
keeping  out  a  short  line  and  changing  over  to  a  far-away 
option  as  delivery  approached. 

But  such  a  method  of  investing  is  extremely  treacherous. 
Any  kind  of  a  squeeze  or  corner  will  start  the  near-by 
option  to  going  upward;  and  the  investment  seller  must 
buy  in  his  short  at  an  advanced  price  or  find  the  commodity 
for  delivery.  Furthermore,  in  such  a  case,  when  he  under- 
takes to  sell  the  far-away  option  in  order  to  recoup  his  loss, 
he  is  likely  to  find  it  quoted,  not  at  a  premium  but  at  a  dis- 
count. Investment  selling  is  so  dangerous  that  the  term 
itself  is  a  misnomer;  and  all  short  sales,  if  made  on  organ- 
ized markets,  should  properly  be  called  speculation. 

Indeed,  it  is  recognized  on  all  sides  that  the  short  con- 
tract is  merely  a  temporary  speculation;  and  shorts  can 


PRICES  — SOME  FALLACIES  CONSIDERED       115 

usually  be  run  to  cover  much  more  easily  than  bulls  can  be 
forced  to  liquidate.  A  long  contract,  however,  can  be 
turned  into  the  solidest  kind  of  an  investment  if  the  pur- 
chaser merely  puts  up  enough  money  to  pay  in  full  for  the 
commodity  or  security  and  takes  the  same  off  the  market. 
Such  being  the  facts,  is  it  not  fallacious  to  maintain  that  the 
seller  has  any  special  facilities  to  tire  out  the  buyer,  or  that 
there  is  such  strength  in  the  position  of  a  bear  in  the  market 
that  he  has  any  preponderating  influence? 

Different  Seasons 

Some  of  those  who  hold  that  organized  speculation  has  a 
tendency  to  lower  the  prices  of  commodities  traded  in,  at 
times  vary  their  charge  by  saying  that  it  is  at  certain  sea- 
sons that  prices  are  lowered,  especially  at  the  time  of  the 
year  when  the  crops  are  coming  to  market.  The  inference 
would  be  that,  in  the  absence  of  speculation,  at  the  season 
for  marketing,  the  commodity  would  naturally  have  the 
lowest  price.  The  crops  must  be  stored  and  carried  till  the 
time  for  consumption  arrives ;  and,  at  market  time,  the  large 
buyers,  knowing  that  their  purchases  constitute  the  princi- 
pal demand,  would  hold  back  their  orders  till  the  producers 
were  willing  to  sell  at  the  lowest  price. 

But  when  we  have  organized  speculation  there  is  a  great 
body  of  traders  dealing  in  futures,  thus  creating  a  demand 
for  the  same,  and  the  cash  market  sympathizes  with  the 
market  for  futures.  This  great  demand  for  speculative  pur- 
poses has  an  overshadowing  influence;  and  hence  the  de- 
mand and  supply  for  the  actual  commodity  is  not  so 
potent.  The  fluctuations,  therefore,  which  would  otherwise 
be  noted,  owing  to  seasonal  scarcity  or  abundance,  are  not 
especially  pronounced. 

In  Table  IV  in  the  Appendix  will  be  found  the  mean  price 
for  wheat  for  each  month  during  the  first  decade  of  the 
present  century.  Also  the  average  price  is  given  for  each 
month  of  the  whole  decade,  so  that  the  reader  can  compare 


116        VALUE  OF  ORGANIZED  SPECULATION 

the  averages  of  any  month  with  the  like  averages  of  any 
other  month  and  form  some  estimate  of  the  seasonal  varia- 
tions in  price.  In  Table  V  like  computations  are  given  for 
corn,  also  for  the  decade  1901-1910.  The  prices  both  of 
wheat  and  of  corn  are  those  which  prevailed  in  Chicago.  In 
Table  VI  we  have  the  average  monthly  prices  of  middling 
upland  cotton  in  New  York  for  the  decade  1900-1909.  And 
in  the  same  manner  as  in  the  tables  for  wheat  and  corn,  the 
average  for  each  month  for  the  whole  decade  has  been  com- 
puted, so  that  any  seasonal  variations  in  price  can  readily 
be  seen.  The  averages  for  wheat,  corn,  and  cotton  derived 
from  these  tables  are  placed  together  in  graphic  form  in 
Diagram  IV,  the  purpose  being  to  make  any  seasonal  move- 
ment of  prices  as  plain  as  possible.  It  will  be  noted  that 
there  is  a  tendency  toward  lower  prices  at  the  time  for 
marketing  and  that  advances  are  more  likely  to  occur  at 
other  times  of  the  year.  But  the  point  especially  worthy  of 
notice  is  that  this  advance,  on  the  average,  is  but  a  mod- 
erate one,  and  is  scarcely  more  than  enough  to  pay  for  the 
cost  of  carrying. 

Examining  the  diagram  in  detail,  we  note  that  wheat 
shows  the  smallest  seasonal  variation.  Indeed,  when  we 
consider  the  cost  of  carrying  the  cereal,  the  prices  given 
during  August  and  September  are  no  doubt  the  best  of  the 
year.  Wheat  is  a  commodity  in  which  there  is  much  specu- 
lation, and  the  effect  of  it  is  seen  in  the  remarkable  even- 
ness which  the  market  holds  as  regards  price  variation 
during  the  different  months. 

There  is  much  less  speculation  in  corn  than  in  wheat,  and 
hence  the  reader  should  not  be  surprised  to  see  that  there  is 
a  greater  difference  in  price  between  the  seasons.  The 
months  of  the  year  in  which  the  new  corn  comes  upon  the 
market  are  seen  to  be  the  lowest;  and  it  is  probably  a  fact 
that  the  high  months  show  enough  of  an  advance  more  than 
to  compensate  for  the  carrying  charge.  However,  doubtless 
owing  to  organized  speculation,  any  such  difference  is  very 


PRICES  — SOME  FALLACIES  CONSIDERED       117 

small;  and  the  good  effects  of  speculation  upon  the  corn 
market  are  seen  in  the  fact  that  the  price  is  able  to  hold  up 
so  well  in  the  face  of  the  enormous  receipts  that  come  on  the 
market  during  the  winter  months. 


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DIAGRAM  IV 


PRICES  OF  WHEAT  AND  CORN  1901-1910  AND  OF  COTTON 
1900-1909  AVERAGED  BY  MONTHS 


118       VALUE  OF  ORGANIZED  SPECULATION 

The  curve  representing  cotton  is  seen  to  fall  considerably 
at  marketing  time,  which  is  perhaps  more  than  can  be 
attributed  solely  to  the  carrying  charge.  Speculation  in 
cotton,  as  has  been  shown  above,  is  subject  to  certain  dif- 
ficulties that  do  not  belong  to  other  forms  of  speculative 
dealing,  which  perhaps  explains  why  it  is  that  the  market- 
ing of  the  crop  has  a  greater  effect  than  in  the  case  of  a 
commodity  such  as  wheat. 

In  general  the  tables  and  diagrams  show  the  remarkable 
effect  of  speculative  demand  in  holding  the  prices  of  com- 
modities firm  at  marketing  time.  It  may  perhaps  puzzle 
some  readers  to  understand  the  importance  of  carrying 
charges,  or  why  it  is  that  the  values  of  commodities  vary 
with  different  seasons  of  the  year.  As  a  familiar  example, 
let  us  consider  potatoes.  Every  one  expects  them  to  be 
higher  in  price  in  the  spring  and  early  summer  than  at 
digging  time;  and  the  reason,  as  every  one  will  agree,  is 
because,  owing  to  their  bulk,  it  costs  much  to  store  them, 
and  there  is  much  loss  from  decay  and  other  causes.  Wheat, 
corn,  and  cotton  are  not  bulky  as  are  potatoes,  and  there  is 
not  nearly  so  much  wastage  in  keeping  them.  But  wheat 
elevators,  corn-cribs,  and  cotton  warehouses  are  costly, 
and  there  is  some  loss,  besides  insurance  premiums  and 
interest  on  money,  which  brings  the  carrying  charges  up 
to  such  a  figure  that  they  must  be  carefully  reckoned 
with. 

As  corroborating  the  position  here  taken,  the  testimony 
of  Mr.  Pillsbury,  quoted  in  a  subsequent  chapter,1  might 
be  referred  to,  in  which  he  says  that  millers  formerly 
made  considerable  profit  by  buying  wheat  in  the  fall  at  the 
time  of  heavy  deliveries,  and  carrying  until  the  time  when 
the  state  of  the  roads  prevented  the  deliveries  from  being 
as  large.  But  since  the  system  of  dealing  in  futures  has 
been  introduced,  the  profit  of  the  millers  is  not  so  great  as 
formerly,  because  they  do  not  have  the  favorable  oppor- 
1  Cf.  pp.  174-175,  infra. 


PRICES  — SOME  FALLACIES  CONSIDERED       119 

tunities  which  they  previously  enjoyed  for  making  cheap 
purchases  of  wheat  at  the  season  when  most  of  the  crop 
comes  upon  the  market. 

Referring  to  Tables  I  and  II  of  the  Appendix,  which 
give  the  extreme  prices  for  wheat  and  corn  and  the  months 
at  which  the  high  and  low  prices  were  reached,  we  find, 
as  would  naturally  be  expected,  that  the  extreme  low  of 
the  year  is  usually  when  the  crop  is  coming  on  the  mar- 
ket, and  the  extreme  high  is  usually  in  the  spring  months. 
However,  as  exceptions  which  tend  to  bring  down  any 
average,  we  might  note  that  in  the  wheat  market,  the 
month  of  September  is  mentioned  as  being  a  high  month 
five  times  and  as  being  a  low  month  but  twice.  Further- 
more the  Hutchinson  corner  in  1888,  when  wheat  went 
to  $2  per  bushel,  occurred  in  September.  As  for  the 
Leiter  corner,  it  powerfully  affected  prices  during  the  sum- 
mer and  autumn  months,  so  that  December  was  the  highest 
month  in  1897,  although  the  high  point  of  $1.85  was  not 
reached  till  the  following  spring,  the  decline  being  rapid 
from  that  point. 

Little  is  to  be  found  in  the  diagrams  and  tables  which 
can  be  construed  as  giving  encouragement  to  the  farmer  to 
store  his  crops  with  a  view  to  selling  at  the  time  when  re- 
ceipts are  lightest  at  the  market  centres.  If  a  farmer  be  not 
already  equipped  with  granaries,  corn-cribs,  and  other 
warehousing  facilities,  he  must  build  them;  and  there  is  de- 
terioration and  risk  of  many  different  kinds  involved  hi 
thus  carrying  his  crops.  Furthermore,  the  average  in  the 
spring  months  is  brought  up  by  corners  and  squeezes  of 
which  it  is  sometimes  difficult  to  take  advantage.  Since 
few  farmers  specialize  as  speculators,  it  would  be  better 
for  most  of  them  to  sell  immediately  at  harvest-time,  leav- 
ing to  speculators  upon  the  exchanges  the  uncertain  pro- 
fits which  come  from  running  risks  in  regard  to  fluctuations 
in  price. 


120        VALUE  OF  ORGANIZED  SPECULATION 

Statistical  Fallacies 

As  just  pointed  out  when  examining  the  effects  of  specu- 
lation upon  the  relative  prices  paid  for  commodities  at  dif- 
ferent seasons,  the  anti-optionists  are  careful  not  to  give 
figures  or  enter  into  any  formal  statistical  argument.  There 
are,  however,  statistics  which  they  sometimes  appeal  to, 
which,  on  their  face,  give  plausibility  to  certain  of  their 
theories.  The  favorite  statistics  used  in  this  connection 
are  those  of  the  general  fall  in  prices  which  characterized 
the  period  between  1873  and  1897.  There  were  times  of 
rising  prices  during  these  years,  but  the  tendency  most  of 
the  time,  as  all  admit,  was  decidedly  downward.  It  so 
happened,  moreover,  that  the  custom  of  dealing  in  futures 
in  agricultural  products,  while  of  course  a  gradual  devel- 
opment, assumed  the  form  of  a  regular  feature  of  the 
markets  at  about  the  year  1870.  Hence  the  coincidence  in 
time  with  the  fall  of  prices  gives  some  plausibility  to  the 
argument. 

In  order  to  make  the  above  argument  impressive,  how- 
ever, it  is  necessary  to  forget  or  ignore  two  important 
economic  facts.  The  first  is  that  the  prices  of  commodities 
which  are  not  traded  in  upon  the  speculative  exchanges 
likewise  declined  at  that  period;  and  the  second  is  that,  be- 
ginning with  1897,  the  tendency  in  all  commodities  has 
been  decidedly  upward,  the  advance  being  led  by  the  agri- 
cultural products  traded  in  upon  the  speculative  exchanges. 
The  reader  has  but  to  refer  to  Diagrams  V,  VI,  and  VII  in 
order  to  see  the  tremendous  rise  in  the  prices  of  wheat, 
corn,  and  cotton  at  that  time.  The  fact  that  commodities 
subject  to  organized  speculation  should  decline  more  than 
others  when  average  prices  were  falling,  and  rise  more  than 
the  average  during  a  general  advance,  proves  nothing  ex- 
cept what  all  should  be  familiar  with,  that  those  commod- 
ities which  have  been  selected  for  speculative  purposes  are 
naturally  ones  the  values  of  which  are  most  fluctuating. 


PRICES  — SOME  FALLACIES  CONSIDERED       121 

The  Question  of  Commissions 

Among  the  sweeping  assertions  of  the  anti-optionists  is 
one  that  the  commissions  for  trading  in  futures  are  paid  by 
the  producers  of  the  commodities  called  for.  It  is  almost 
impossible  to  argue  the  question  with  them,  because  they 
never  give  proof  or  indicate  in  any  way  by  what  possible 
line  of  reasoning  they  arrive  at  the  conclusion.  Their  easy 
method  of  settling  the  question  will  not  bear  examination; 
but  the  problem  of  who  pays  the  commissions  is  an  interest- 
ing one,  and,  in  solving  it,  we  find  that  the  facts  are  grouped 
a  little  differently  than  in  other  departments  of  economics. 

As  for  the  commissions  upon  the  actual  commodities  when 
they  are  shipped  to  the  board  of  trade,  let  us  say,  and  sold 
by  sample  to  a  miller  or  exporter,  they  are  ultimately  paid 
by  the  same  parties  who  would  pay  commissions  and  other 
expenses  if  the  board  of  trade  did  not  exist.  They  are  paid 
by  the  same  parties  that  pay  any  part  of  the  cost  of  dis- 
tributing or  producing  commodities. 

As  for  the  commissions  upon  the  purely  speculative  deals, 
the  question  would  be  answered  differently  by  different 
people  according  to  the  respective  positions  taken  in  re- 
gard to  the  nature  of  those  transactions.  For  those  who 
believe  that  trading  in  contracts  to  deliver  commodities  is 
pure  gambling,  and  that  no  deliveries  are  ever  made  upon 
such  contracts,  or  those  who  deny  that  the  contracts  have 
anything  whatever  to  do  with  actual  commodities,  the  posi- 
tion might  consistently  be  taken  that  these  commissions 
are  paid  by  the  same  class  of  persons  who  pay  the  ex- 
penses of  a  gambling-house,  namely,  the  patrons  of  the 
house  —  the  players.  It  is  difficult  to  understand  how  any 
one  who  takes  the  above  position  can  consistently  say 
that  the  expenses  of  trading  are  paid  by  the  producers. 
They  might  as  well  attempt  to  argue  that  the  percentages 
made  by  the  book-makers  on  a  race-track  are  paid  by  the 
farmers  who  breed  the  horses. 


122        VALUE  OF  ORGANIZED  SPECULATION 

Moreover,  opinions  differ  among  the  anti-optionists 
themselves.  Not  only  do  they  differ  as  between  individuals, 
but  the  opinions  of  the  same  anti-optionist,  like  the  market 
that  he  is  always  dreaming  about,  may  fluctuate  con- 
stantly according  to  the  exigencies  of  the  moment.  In- 
deed, there  are  few,  if  any,  who  stick  consistently  to  the  pro- 
position that  organized  speculation  is  pure  gambling  and 
that  no  deliveries  are  ever  made  upon  futures.  Many  of 
them  will  make  assertions  to  this  effect;  but,  perhaps  the 
next  minute,  they  will  be  saying  something  which  is  abso- 
lutely inconsistent  therewith.  Most  of  them,  in  so  far  as 
what  may  be  called  their  leading  ideas  can  be  separated 
from  their  various  inconsistent  assertions,  take  a  position 
somewhat  similar  to  that  of  this  essay,  namely,  when  traders 
are  buying  and  selling  according  to  the  custom  of  the  ex- 
changes, and  when  contracts  are  sold  to  others  before  de- 
livery is  made,  the  thing,  which  in  most  such  cases  is  being 
traded  in,  is  contracts. 

But  if  anti-optionists  agree  with  those  of  us  who  think 
in  this  way,  then  the  same  principles  should  apply  as  in  the 
case  of  any  trading  in  contracts  to  pay  or  deliver.  Thus, 
if  an  investor  buys  a  promissory  note,  or  a  mortgage,  or  a 
railroad  bond,  it  is  rightly  assumed  that  the  question  of 
who  pays  the  commissions  is  to  be  determined  in  the  same 
manner  that  would  be  pursued  in  regard  to  any  invest- 
ment. Promises  to  deliver  commodities  are  no  different  in 
this  respect  from  promises  to  pay  money.  When  such  an 
obligation  is  bought,  it  is  absurd  to  go  back  of  the  contract 
traded  in  and  say  that  the  producer  of  the  commodity 
which  the  contract  calls  for  is  the  one  who  pays  a  commis- 
sion for  its  transfer. 

But  the  anti-optionists  do  not  stick  consistently  to  the 
idea  that  trading  in  futures  is  usually  trading  in  contracts. 
Frequently,  indeed,  we  find  them  saying  that  the  contracts 
have  nothing  whatever  to  do  with  the  commodities  called 
for;  but,  at  other  times,  they  appear  to  conceive  of  them  as 


PRICES  — SOME  FALLACIES  CONSIDERED     123 

a  kind  of  substitute  for  the  commodity.  Thus  they  are 
never  tired  of  saying  that  a  contract  to  deliver  wheat,  if 
thrown  upon  the  market,  will  depress  the  price  of  wheat. 
In  so  far  as  such  a  statement  means  that  the  market  for 
actual  wheat  sympathizes  with  the  fluctuations  of  the 
market  for  futures,  they  are  right.  But  establishing  the 
point  just  stated  is  not  proving  that  the  commissions  for 
trading  in  a  contract  are  paid  by  the  producer  of  what  the 
contract  calls  for. 

The  money  market  and  the  market  for  securities  are  re- 
lated in  their  fluctuations;  but  when  an  investor  or  specu- 
lator buys  a  railroad  bond,  the  commission  on  the  trans- 
action is  not  to  be  paid  by  the  gold  miner  who  produces 
the  gold  which  the  bond  in  its  ultimate  analysis  calls  for. 
If,  for  the  sake  of  argument,  we  consider  the  supply  of 
what  is  called  "wind"  wheat  as  a  part  of  the  supply  of  the 
actual  commodity,  then  there  is  no  more  reason  for  say- 
ing that  the  part  which  the  farmer  produces  pays  the  ex- 
penses of  producing  the  "wind"  part  than  there  is  for  say- 
ing that  the  producers  of  the  "wind"  pay  the  farmer's  cost 
of  producing  the  actual  wheat.  In  truth,  however,  each 
helps  the  other;  for  the  large  amount  of  both  kinds  of  trad- 
ing enables  the  commission  man  to  do  a  larger  business  and 
to  do  it  more  cheaply. 

Clearing-House  Transactions 

The  resemblance  between  the  methods  by  which  paper 
representatives  are  used  to  take  the  place  of  commodities 
in  transactions  upon  the  exchanges  and  their  like  use  in 
finance  is  so  obvious  that  it  is  an  excellent  argument  for 
identifying  the  two  classes  of  transactions ;  since  organized 
speculation  rests  its  case  on  the  fact  that  it  is  a  modern  sys- 
tem and  exemplifies  the  best  and  most  economical  methods 
of  dealing.  The  statement  is  made,  however,  that  real 
money  is  behind  every  note,  check,  or  draft  in  a  bank  clear- 
ing-house; while  upon  the  speculative  exchanges,  by  the 


124        VALUE  OF  ORGANIZED  SPECULATION 

ringing-out  process,  the  delivery  of  the  commodity  is  dis- 
pensed with.1 

But  the  statement  is  a  mistaken  one.  Indeed,  the  strik- 
ing feature  in  modern  finance  is  that  actual  money  plays 
such  a  small  part  in  doing  the  work  of  making  transfers. 
By  examining  any  bank  statement  we  see  what  a  small  pro- 
portion the  actual  money  on  hand  bears  to  the  total 
amount  of  either  the  deposits,  the  loans,  or  the  clearings. 
In  truth,  the  analogy  is  perfect  between  the  forms  of  mod- 
ern banking  and  the  manner  in  which  representatives  take 
the  place  of  commodities  upon  an  exchange. 

In  banking  the  depositor  has  the  right  to  demand  gold 
or  legal  tender  for  every  dollar  of  his  deposit.  A  few  de- 
positors do  make  such  demand;  and,  if  paid  in  paper  legal 
tenders,  they  are  redeemable  in  actual  gold.  But  the  de- 
posits of  a  bank  far  exceed  in  amount  the  money  available 
to  pay  them,  and  very  few  depositors  want  the  money  itself. 
The  deposits  exist  upon  the  books  of  the  bank,  and  are 
transferred  from  one  account  to  another  or  from  one  bank 
to  another  by  the  different  financial  instruments. 

It  is  precisely  the  same  in  principle  with  futures  upon 
the  board  of  trade.  The  seller  is  in  all  cases  obligated  to 
deliver  the  actual  commodities  called  for  by  the  contract, 
which  he  may  do  by  warehouse  receipts.  In  some  cases 
the  buyer  does  insist  on  getting  such  delivery,  and  uses  the 
warehouse  receipts  to  draw  out  from  the  elevator  or  ware- 
house the  wheat  or  other  commodity,  whatever  it  may 
be.  But  in  most  cases  purchases  and  sales  are  checked 
off  against  each  other  by  modern  accounting  methods; 
and  intangible  promises  are  thus  made  to  perform  the 
purpose  of  actual  transfers  of  commodities  in  the  same 
way  that  all  the  instruments  of  modern  finance  are  utilized 
to  save  the  handling  of  actual  gold  in  monetary  transac- 
tions. 

1  Cf.  Testimony  before  Committee  on  Agriculture,  House  of  Representa- 
tives, 1st  Sess.,  52d  Congress,  p.  286. 


PRICES  — SOME  FALLACIES  CONSIDERED      125 

Hedging  misunderstood 

The  purpose  of  hedging,  as  before  explained,  is  to  pro- 
vide compensation  against  loss  in  a  business  transaction 
by  making  a  deal  of  a  different  nature  which  will  pay  a 
profit,  or  at  least  remain  intact,  at  the  same  time  that  the 
first  deal  is  showing  a  loss.  The  anti-optionists  fail  to  un- 
derstand such  a  transaction.  They  think,  or  some  of  them 
do,  that  the  hedging  deal  is  a  separate  trade  and  has  no  con- 
nection with  the  original  one.  For  instance,  Mr.  W.  E. 
Bear,  in  condensing  and  re-stating  the  opinion  of  Mr.  C. 
Wood  Davis,  says  that  after  a  receiver  "has  bought  a 
quantity  of  grain  he  hedges  by  selling  a  future  against  it, 
and  he  has  no  further  interest  in  the  price  of  the  actual 
grain,  while  he  has  an  abiding  and  intensely  absorbing  in- 
terest in  depressing  the  price  in  order  that  he  may  buy  in 
his  outstanding  contracts  at  a  profit."1 

In  answering,  it  may  be  admitted  that,  considering  both 
deals  together,  the  hedger,  after  he  has  made  them,  has 
no  further  interest  in  the  price  except  in  so  far  as  the 
original  deal  and  the  hedging  deal  may  not  move  exactly 
in  harmony.  But,  according  to  the  critics  just  quoted,  the 
two  deals  apparently  do  not  stand  together  in  the  mind  of 
the  hedger;  for  it  is  declared  that  he  has  no  further  interest 
in  the  price  of  the  actual  grain,  but  at  the  same  time  he  is 
very  anxious  to  make  a  profit  on  his  short  sale. 

Perhaps  a  practical  example  will  best  bring  out  the  fal- 
lacy of  this  argument.  Suppose  the  receiver  buys  wheat 
at  $1  per  bushel  and  sells  against  it  at  $1.05.  Suppose 
further  that  the  cash  wheat  and  the  option  each  decline  10 
cents.  The  cash  wheat  would  then  be  90  cents  and  the 
option  95  cents.  The  dealer,  who  is  so  intensely  interested 
in  seeing  the  price  of  his  future  go  down,  now  has  a  profit 
on  it  of  10  cents  and  a  loss  on  his  actual  wheat  of  the  same 
amount.  He  closes  both  deals,  and  receives  the  account  of 
1  Journal  of  the  Royal  Agricultural  Society,  vol.  iv.  Third  Series,  p.  305. 


126         VALUE  OF  ORGANIZED  SPECULATION 

purchase  and  sale  from  his  broker.  This  shows  that  he  has 
made  10  cents  per  bushel  in  his  transaction  in  futures.  But, 
when  he  examines  the  account  of  his  cash  transaction,  he 
finds  that  he  has  lost  10  cents  per  bushel;  and  hence  we  see 
the  absurdity  of  supposing  that  he  has  no  interest  in  the 
price  of  actual  grain. 

Either  the  deals  should  be  considered  together  or  they 
should  be  considered  separately.  If  they  are  considered 
together,  then  the  hedger  has  no  interest,  or  little  interest, 
in  the  fluctuations  in  the  price  of  either  futures  or  actual 
wheat  after  he  has  hedged.  But  if  they  are  to  be  considered 
separately,  then  he  has  an  intense  interest  in  getting  a 
profit  on  his  short  sale  and  an  equally  intense  interest  in 
getting  a  profit  on  his  long  purchase.  Thus  his  interests  in 
the  market  balance;  which  brings  us  back  to  the  original 
proposition,  that  after  he  has  hedged  he  does  not  wish  the 
market  to  go  up  any  more  than  he  wishes  it  to  go  down. 
But  when  we  fail  to  realize  this  balancing  of  interests,  and 
assert  that  he  has  no  interest  in  his  long  deal,  but  at  the 
same  time  is  greatly  interested  in  his  short  deal,  the  height 
of  absurdity  is  reached. 

Restricting  Trade 

It  is  seen  from  the  position  taken  by  different  writers  and 
business  men,  as  discussed  above,  that  the  fault  which  is 
most  often  found  with  organized  speculation  is  that  it 
favors  short  selling.  But  it  would  appear  that  when  the 
liberty  either  to  buy  or  to  sell,  according  to  the  opinion  of 
the  trader  upon  the  market,  is  restricted,  the  idea  of  a  free 
exchange  has  been  lost  sight  of.  For  organized  speculation 
exists  in  order  to  make  prices;  and  the  principle  on  which 
it  is  based  is  that  the  best  method  to  give  freedom  in  price- 
making  is  to  afford  the  greatest  facility  to  all  parties  to 
make  such  bids  and  offers  as  they  wish. 

When  you  give  people  the  impression  that  you  are  afraid 
that  they  will  do  a  certain  thing,  you  increase  their  desire 


PRICES  — SOME  FALLACIES  CONSIDERED      127 

to  do  it.  Parents  and  guardians  keep  this  idea  in  mind  while 
training  children,  and  the  principle  is  worthy  of  being  con- 
sidered by  older  people  as  well.  It  is  applicable  in  small 
business  enterprises  as  well  as  large  ones,  and  it  becomes 
especially  important  in  banking.  The  bank  officer  who 
wishes  to  avoid  a  run  on  his  institution  never  does  so  by 
informing  his  depositors  that  the  bank  cannot,  or  will  not, 
pay  them.  On  the  contrary,  unless  the  bank  actually  sus- 
pends payment,  he  is  loud  in  his  protestations  that  he  is 
perfectly  willing  to  pay  all  depositors  in  full. 

Returning  now  to  the  speculative  markets,  it  may  be 
said  that  if  you  diffuse  in  the  minds  of  the  speculators  the 
idea  that  some  one  is  afraid  they  will  sell  too  freely,  you 
create  distrust  at  just  the  time  when  it  is  most  harmful.  In 
the  excitement  of  a  bull  campaign,  this  distrust  might  not 
show  itself  at  first;  but  when  the  tide  turned,  and  the 
numerous  long  holders  began  to  realize,  it  would  suddenly 
be  remembered  that  an  important  class  of  sales  had  been 
prohibited,  that  the  steadying  effect  of  the  covering  of 
shorts  would  then  be  absent,  and  that  all  the  long  buyers 
who  had  contributed  to  the  advance  must  engage  in  a 
frantic  scramble  to  sell.  Thus  a  one-sided  market  is  one- 
sided going  up  and  one-sided  coming  down.  It  is  impos- 
sible to  make  the  market  so  that  all  deals  must  in  every 
case  be  purchases.  By  attempting  such  a  thing  the  princi- 
pal effect  is  to  bunch  the  persistent  buyers  at  one  time  and 
the  persistent  sellers  at  another.  The  only  method  by 
which  this  condition  can  be  avoided  is  to  permit  such  free- 
dom in  trading  that  selling  and  buying  stand  on  the  same 
plane,  so  that  one  may  sell  before  he  buys  or  buy  before  he 
sells  with  equal  facility. 

Commerce  is  Natural 

To  attempt  to  interfere  with  commerce  and  to  mutilate, 
bind,  and  restrict  it  so  that  it  may  be  made  to  go  at  the 
certain  kind  of  a  hop,  skip,  and  jump  that  its  trainer  wishes, 


128       VALUE  OF  ORGANIZED  SPECULATION 

is  a  fallacy.  It  may  apparently  perform  these  antics,  and 
they  may  be  curious  in  the  same  way  that  the  acrobatic 
feats  of  men  and  animals  are  curious.  Yet  the  units  in  the 
world  of  trade  and  production  do  not  best  accomplish  their 
daily  tasks  by  relying  on  commercial  gymnastics. 

Commerce  acts  best  where  it  is  free;  and  the  attempt, 
particularly  so  to  restrict  it  that  purchases  and  sales  do  not 
stand  on  an  equal  footing,  has  been  made  by  nations  with 
unfortunate  results.  There  must  be  a  sale  with  every  pur- 
chase. It  is  trade  that  makes  trade.  If  speculators  know 
that  they  may  sell  when  they  wish,  they  will  be  able  to 
buy  with  better  discretion;  and  their  action  both  in  buying 
and  selling  will  be  better  distributed  and  serve  to  steady 
the  market.  The  Mercantilists  thought  that  they  could  so 
arrange  things  that  certain  people  would  do  most  of  the 
buying  while  certain  others  did  the  selling;  but  their  efforts 
to  accomplish  the  results  hoped  for  were  futile.  Reciprocal 
action  must  be  appreciated  if  there  is  to  be  freedom  of 
trade,  and  the  true  effect  of  bargaining  cannot  be  realized 
if  there  be  restriction  at  any  point. 

The  Legitimacy  of  Fluctuations 

It  is  perhaps  because  of  the  manner  of  doing  business 
upon  a  speculative  exchange  —  because  of  the  very  absurd- 
ity of  men  standing  about  and  shouting  business  proposi- 
tions at  one  another;  or  conceivably  the  temptations  into 
which  the  speculators  are  led  is  the  reason;  or  possibly  it  is 
because  the  deliveries  of  actual  commodities  upon  an  ex- 
change are  so  few;  or,  most  likely  of  all,  it  may  be  because 
those  who  lose  money  in  speculative  operations  wish  to 
^/attribute  their  losses  to  any  cause  but  their  own  folly;  — 
for  some  or  all  of  these  reasons  the  impression  has  become 
common  and  it  is  frequently  stated  that  the  quotations 
which  issue  from  a  speculative  exchange  are  not  legitimate, 
and  that  they  are  merely  used  for  the  purpose  of  deceiving 
people.  Those  outside  exchange  circles  get  their  ideas  from 


PRICES  —  SOME  FALLACIES  CONSIDERED     129 

various  sources  which  exaggerate  the  power  of  prominent 
traders,  and  the  rank  and  file  of  speculators  believe,  or  pre- 
tend to  believe,  that  the  commission  houses  are  in  league 
with  the  market  leaders,  that  the  position  of  the  traders  in 
the  market  as  to  whether  they  are  long  or  short  and  the 
size  of  their  margins  is  communicated  to  these  leaders,  and 
that  they  then  put  the  market  to  such  a  place  that  the 
greatest  number  of  accounts  will  be  frozen  out.  And  each 
speculator  thinks,  or  pretends  to  think,  that  his  own  par- 
ticular account  is  the  one  for  which  they  are  especially 
gunning. 

Before  considering  these  charges,  it  should  in  all  fairness 
be  admitted  that  other  forms  of  business,  as  well  as  the 
purely  speculative  ones,  are  subject  to  arbitrary  and  un- 
natural methods  in  fixing  prices.  Beginning  with  the  large 
trusts,  and  passing  to  those  combinations  which  exist 
among  milkmen,  cab-drivers,  and  even  among  professional 
men  and  laborers,  we  can  readily  see  that  there  is  no  pro- 
fession or  employment  in  which  the  buyer  and  seller  come 
together  in  exactly  the  manner  assumed  by  the  classical 
economists,  or  in  which  they  buy  and  sell  only  according  to 
the  motives  which  actuate  the  supposed  economic  man. 
Custom  plays  a  larger  part  in  fixing  prices  than  many  im- 
agine; and  sentiments,  both  good  and  bad  in  a  moral  sense, 
are  always  having  their  effects  in  making  prices  and  direct- 
ing trade.  But  the  faults  of  the  exchanges  as  price-makers 
are  not  similar  in  all  respects  to  the  particular  faults  which 
result  in  artificial  prices  in  outside  business;  and  neither 
those  who  are  unfamiliar  with  exchange  operations,  nor 
those  who  are  embittered  by  the  loss  of  their  money,  are  the 
ones  best  fitted  to  make  an  impartial  criticism. 

However,  many  of  the  arguments  advanced  by  critics 
must  be  admitted  to  have  weight.   It  is  true  that  there  is 
manipulation  of  prices;  and  it  is  also  admitted  herein  that    „ 
some  of  the  fluctuations  in  the  prices  of  future  and  other 
contracts  are  not  due  to  legitimate  changes  in  the  value  of 


130        VALUE  OF  ORGANIZED  SPECULATION 

the  commodities  which  are  ultimately  to  be  delivered;  that 
many  of  them  are  due  to  changes  in  the  value  of  contracts 
considered  as  counters  in  the  game  of  speculation,  and  that 
primarily  what  the  parties  are  really  trading  in  is  con- 
tracts. 

Having  admitted  so  much,  it  would  appear  to  many  per- 
sons that  the  whole  criticism  of  exchange  operations  is  con- 
ceded. Yet  trading  in  promissory  notes,  bonds,  and  other 
contracts  is  not  considered  illegitimate  if  done  outside 
exchange  walls ;  and  many  who  do  not  call  to  mind  this  fact 
adhere  to  the  fallacy  that,  if  trading  be  really  in  contracts, 
then  the  demand  and  supply  of  the  actual  commodity  called 
for  can  have  no  effect  upon  the  quotations  that  issue.  The 
question  is  a  difficult  one,  and  perhaps  a  practical  illustra- 
tion will  throw  some  light  upon  the  matter. 

Let  us  suppose  an  extreme  case  —  that  a  clearing-house 
which  clears  grain  has  1,000,000  bushels  of  a  particular 
long  wheat  future  upon  its  books  and  1,000,000  bushels  of 
the  future  short,  and  that  there  is  only  a  possible  supply  of 
100,000  bushels  of  actual  wheat  in  the  local  elevators,  or 
within  such  distance  that  it  is  practicable  under  ordinary 
circumstances  to  ship  it  in  and  use  it  to  make  deliveries.  To 
some  it  would  appear  that  a  "natural  corner"  would  result 
at  once;  for,  so  they  would  say,  the  shorts  would  begin  bid- 
ding for  1,000,000  bushels  to  fill  contracts,  and  the  100,000 
bushels  of  actual  wheat  would  scarcely  count  in  the  scram- 
ble. To  the  anti-optionists  it  would  appear,  on  the  con- 
trary, that,  under  the  conditions  supposed,  the  holders  of 
long  contracts  would  attempt  to  sell  them;  and,  finding  no 
buyers,  the  decline  would  be  tremendous. 

In  actual  practice,  both  of  these  theories  would  be  par- 
tially right,  and  both  would  be  partially  wrong.  Some,  but 
not  all,  of  the  shorts  would  wish  to  cover,  and  some,  but  not 
all,  of  the  longs  would  wish  to  liquidate.  And  there  would 
be  new  long  deals  made,  and  also  new  short  deals,  mixed 
indistinguishably  with  the  others.  As  the  time  for  delivery 


PRICES  — SOME  FALLACIES  CONSIDERED      131 

approached,  however,  both  longs  and  shorts  would  be 
changing  over  to  a  more  distant  option;  and,  when  the 
month  for  delivery  actually  arrived,  there  would  be  com- 
paratively speaking  but  a  small  amount,  either  of  long  or 
short  wheat,  open.  The  100,000  bushels  of  actual  wheat  in 
the  case  supposed  would  then  be  sufficient  in  most  years  to 
make  the  few  deliveries  desired.  The  explanation  of  the 
quiet  accomplishment  of  this  result  is  found  in  the  fact  that 
so  many  of  the  long  future  contracts  had  rung  out  with  so 
many  of  the  short  contracts  that  there  was  only  a  small 
amount  of  wheat  which  was  required  to  be  delivered  when 
this  process  had  been  accomplished.1 

By  duly  considering  the  fact,  therefore,  that  the  average 
speculator  settles  his  long  contract  by  selling  a  short  one, 
and  settles  his  short  contract  by  buying  a  long  one,  it  is 
seen  that  the  purely  speculative  business  nearly  balances 
itself;  and  that  the  demand  for,  and  supply  of,  the  actual 
commodity  is  an  influence  of  the  first  importance.  The  dif- 
ferent factors  mentioned  in  this  essay  and  others  of  less 
weight  will  in  the  end  have  their  effect.  The  shorts  would 
be  the  most  anxious  to  close  their  contracts ;  but  the  longs, 
also,  would  be  frequently  stampeded.  The  hopes  and  fears 
and  the  different  subjective  estimates  of  the  various  parties 
in  regard  to  the  value  of  the  contracts  would  result  in  the 
short  choppy  movements  of  the  market.  But  neither  bulls 
nor  bears  would  all  be  likely  to  attempt  to  do  the  same 
thing  at  the  same  time;  when  a  bear  rushed  to  cover,  he 
would  in  most  cases  find  a  bull  who  wished  to  liquidate  at 
the  prevailing  price.  When  long  periods  are  considered, 

1  "  It  may  be  urged  that  the  same  quantity  of  wheat,  which  would  have 
been  sold  but  once  by  the  farmer,  is  now  offered  first  by  the  farmer  to  the 
short  seller,  next  by  the  short  seller  to  the  long  buyer,  and  finally  by  the 
latter  again  to  somebody  else,  thus  swelling  the  apparent  supply  and 
tending  to  lower  prices.  But  in  all  such  cases  the  fictitious  supply  has  been 
met  by  a  fictitious  demand,  which  have  all  been  balanced  long  before  the 
month  for  which  the  contract  had  been  concluded  has  arrived."  Report  of 
the  Industrial  Commission,  vol.  vi,  p.  190. 


132       VALUE  OF  ORGANIZED  SPECULATION 

however,  and  also  the  wider  market  movements,  the  de- 
mand and  supply  of  the  actual  commodity  would  have  an 
influence  much  greater  than  any  other  factor. 

Some  of  the  sellers  of  futures  would  insist  that  they  be 
permitted  to  deliver  the  actual  commodity;  and  some  of 
the  buyers  would  insist  that  the  actual  commodity  be  de- 
livered to  them.  Combining  this  supply  and  demand  with 
the  supply  offered  by  producers  and  the  demand  from  con- 
sumers, we  have  the  element  which  varies  the  most  and  the 
one  which  would  be  more  likely  to  turn  the  scale  than  any 
other. 

This  theory  of  prices  upon  a  speculative  exchange  is 
abundantly  borne  out  by  statistics.  Laying  aside  the  gusts 
and  eddies  of  speculation  and  the  choppy  movements,  it 
will  be  found  that,  notwithstanding  the  manipulations  that 
take  place,  the  prices  of  commodities  vary  with  the  demand 
and  supply  as  shown  by  the  net  visible  supply  in  store. 

In  Table  VII  of  the  Appendix  will  be  found  the  mean 
prices  of  wheat  in  Chicago,  computed  separately  for  each 
month,  and  averages  taken  for  each  year  ending  with  June 
30.  Table  VIII  gives  the  visible  supply  in  this  country  and 
Canada,  not  disposed  of  with  reference  to  ultimate  destina- 
tion, but  easily  obtainable  to  influence  the  market  or  to 
supply  any  unexpected  demand,  as  it  was  reported  for  the 
first  of  each  month  in  the  years  named,  also  the  visible  sup- 
ply averaged  each  year  ending  June  30.  In  Diagram  V  is 
shown  a  curve  representing  the  yearly  average  prices  as 
given  in  Table  VII  and  another  representing  the  variations 
in  the  visible  supply  as  given  in  Table  VIII.  The  curve 
representing  the  visible  supply  has  been  reversed,  so  that, 
when  it  bends  downward,  it  shows  that  the  supply  is  grow- 
ing larger,  and  when  it  bends  upward,  a  smaller  supply  is 
indicated.  The  reason  the  curve  was  made  to  vary  in  this 
way  is  because  an  increase  in  the  visible  supply  is  a  bearish 
indication,  and  a  decrease  is  a  bullish  indication.  If,  then, 
the  price  of  wheat  goes  down  with  an  increase  in  the  visible 


PRICES  — SOME  FALLACIES  CONSIDERED      133 

supply,  and  goes  up  with  a  decrease,  the  curves  as  arranged 
would  indicate  it,  and  suggest  that  the  market  did  move  in 
harmony  with  the  demand  and  supply  as  revealed  in  the 
visible. 


1.20 
1.15 
1.10 
1.05 
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DIAGRAM 

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s-1 

DIAGRAM  V 

AVERAGE  PRICES  OF  WHEAT  AND  AVERAGE  VISIBLE  SUPPLY 
(REVERSED)  YEARS  ENDING  JUNE  30 

By  examining  the  diagram  the  reader  will  see  that,  while 
there  is  by  no  means  a  proportionate  variation  between  the 
two  curves,  their  most  important  movements  are  coinci- 
dent. Furthermore,  it  is  seen  that  prices  have  a  tendency 
to  move  sooner  than  the  visible  supply,  thus  indicating 
that  the  market  leaders,  from  the  reports  of  crops  and  acre- 
age, together  with  other  indications  of  prospective  change 
in  demand  and  supply,  were  able  to  predict  what  the  visible 
would  be,  and  hence  to  initiate  a  price  movement  before  the 
demand  and  supply  of  the  actual  commodity  were  reflected 
in  the  visible. 

In  Tables  IX  and  X,  of  the  Appendix,  are  given  the 


134        VALUE  OF  ORGANIZED  SPECULATION 

prices  of  corn  in  Chicago  and  the  visible  supply,  compiled 
in  the  same  manner  as  the  previous  tables.  In  Diagram  VI 
we  have  curves  arranged  similarly  to  those  in  the  preceding 
diagram,  with  a  result  almost  as  striking  as  in  the  case  of 
wheat. 

In  Table  XI  we  have  the  average  monthly  price  of  mid- 
dling uplands  cotton  in  New  York,  and  in  Table  XII  the 


*7f) 

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DIAGRAM 

VI. 

DIAGRAM  VI 

AVERAGE  PRICES  OF  CORN  AND  AVERAGE  VISIBLE  SUPPLY 
(REVERSED)  YEARS  ENDING  JUNE  30 

visible  supply  of  American  cotton,  the  year  ending  on  Aug- 
ust 31  with  the  crop  year.  These  statistics  of  cotton  are  pre- 
sented in  graphic  form  in  Diagram  VII.  Notwithstanding 
the  Sully  campaign  and  other  manipulations,  we  find  that 
the  prices  of  cotton  also  vary  with  the  demand  and  supply 
of  the  commodity. 

In  considering  the  prices  of  stocks  and  securities,  it  will 
be  noted  that  the  question  of  whether  they  respond  to  the 


PRICES  — SOME  FALLACIES  CONSIDERED     135 

demand  and  supply  for  such  investments  cannot  be  deter- 
mined in  a  similar  manner,  as  there  are  no  statistics  of 
the  amount  of  securities  awaiting  digestion.  But  it  can 
be  shown  that  the  average  prices  fixed  for  them  upon  the 
stock  exchange  respond  to  the  legitimate  influences  which 
should  and  do  govern  their  values.  Among  the  influences 


14.00 
13.00 
12.00 

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9.00 
8.00 
7.00 
6.00 
1.80 
2.00 
2.20 
2.40 
2.60 
2.80. 
3.00 
3.20 
3.40. 

^^ 

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DIAGRAM 

VII. 

DIAGRAM  VII 

AVERAGE  PRICES  OF  COTTON  AND  AVERAGE  VISIBLE 
SUPPLY  (REVERSED)  YEARS  ENDING  AUGUST  31 

that  should  determine  the  legitimate  value  as  an  invest- 
ment of  a  railroad  or  industrial  stock,  the  dividend  that  it 
pays,  and  the  prospects  for  future  dividends  as  revealed  by 
its  earning  power,  are  no  doubt  the  most  important.  In 
stocks,  as  in  commodities,  there  are  numerous  false  moves 
in  prices,  and  many  cases  in  which  a  stock  will  fail  to  con- 
form in  price  to  a  legitimate  influence.  When,  however,  the 
prices  of  a  number  of  stocks  are  averaged,  and  when  the 


136        VALUE  OF  ORGANIZED  SPECULATION 

principal  controlling  facts  just  mentioned  are  carefully  cal- 
culated, we  should  not  be  surprised  to  find  that  prices 
fixed  upon  the  stock  exchange  are  governed  in  their  wide 
swings  by  legitimate  influences. 

In  Table  XIII,  in  the  Appendix,  will  be  found  the  aver- 
age relative  prices  of  forty  common  stocks  for  the  years 
designated  ending  on  June  30.  The  stocks  which  enter  into 
these  averages  comprise  thirty-five  railway  stocks  and  five 
express,  steamship,  and  telegraph  stocks.  The  quotations 
were  taken  from  the  "Financial  Review,"  and  were  aver- 
aged under  the  direction  of  Wesley  C.  Mitchell.  The  rail- 
way dividends  per  mile  and  the  net  income  of  the  railways 
per  mile,  which  also  appear  in  the  table,  were  reduced  to 
relative  figures  on  the  basis  of  averages  for  1809-99  by  the 
same  writer  from  the  "Reports  of  the  Interstate  Commerce 
Commission."  1 

The  statistics  have  been  placed  in  graphic  form  in  Dia- 
gram VIII,  so  that  the  relation  of  cause  and  effect  between 
the  different  factors  can  be  readily  traced.  It  is  seen  at 
once  that  the  prices  for  stocks  respond  to  the  legitimate 
market  influences  as  well  as  to  the  prices  for  commodities. 
The  movements  are  not  proportionate  in  stocks  any  more 
than  they  are  in  the  case  of  commodities;  but  the  facts 
which  should  naturally  determine  values  are  obviously  re- 
flected in  the  prices.  It  will  be  noted  that  the  income  of 
railroads  affords  perhaps  a  better  reliance  than  the  divid- 
ends. For  instance,  it  will  be  seen  that  the  panic  of  1903 
resulted  in  a  depression  in  prices  shown  in  the  year  ending 
June  30, 1904,  and  that  there  is  also  a  decline  in  the  income 
of  railways  at  that  date,  whereas  the  dividend  rates  suf- 
fered no  average  decline.  But  the  obvious  explanation  is 
found  in  the  custom  of  American  railway  officers  in  keeping 
the  rate  of  dividend  on  their  properties  as  steady  as  pos- 
sible, and  not  varying  it  either  up  or  down  to  suit  all 
changes  in  income. 

1  Journal  of  Political  Economy,  vol.  18,  p.  369;  vol.  19,  p.  298. 


PRICES  — SOME  FALLACIES  CONSIDERED     137 

As  stated  heretofore,  the  influences  mentioned  are  not 
the  only  legitimate  ones.  For  instance,  the  average  return 


2.40 
2.20 
2.00 
1.80 
1.60 
1.40 
1.20- 
1.00 
<80 
3.00 
2.80 
.2.60 
2.40 
'2.20 
,2.00 
1.80 
1.60 
1.40 
1.20 
1.00 
.80 

3.00 
2.50 
2.00 
1.50 
1.00 
.50 

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DIAGRAM 

VIII, 

DIAGRAM  VIII 

RELATIVE  RAILWAY  DIVIDENDS,  NET  INCOME  AND 
PBICES  OF  STOCKS  YEARS  ENDING  JUNE  30 


138        VALUE  OF  ORGANIZED  SPECULATION 

upon  capital  is  important,  and  the  condition  of  the  banks 
throws  much  light  on  certain  financial  conditions  which  go 
far  to  account  for  market  movements.  Referring  to  the 
decline  after  the  panic  of  1907,  as  revealed  in.  the  above 
diagram  for  the  year  ending  June  30, 1908,  it  will  be  seen  that 
the  decline  in  income  was  quite  small,  and  that  the  decline 
in  dividends  did  not  make  its  appearance  till  the  year  end- 
ing in  June,  1909,  —  which  corroborates  the  fact  of  com- 
mon knowledge,  that  the  panic  of  1907  was  chiefly  financial 
in  its  nature,  and  its  effects  were  not  so  important  in  the 
world  of  general  commerce  as  has  been  the  case  in  other 
panics  and  crises. 

Unless  the  tables  and  diagrams  given  herein  are  proved 
to  be  false,  it  is  believed  the  assertion  should  not  be  made 
that  the  quotations  which  come  upon  the  tape  are  merely 
a  string  of  figures  sent  out  by  the  market  leaders  with  the 
intention  of  deceiving  the  public.  The  more  the  problem 
is  examined,  the  stronger  becomes  the  conviction,  that  these 
leaders  are  but  a  part  of  the  vast  mechanism  of  commerce, 
and  that  they  can  only  succeed  by  conforming  their  opera- 
tions, hi  the  broad  outlines  at  least,  to  the  legitimate  tend- 
encies of  the  market. 

Summary  of  the  Last  Two  Chapters 

If  trade  were  really  free,  if  all  dealers  and  producers 
acted  with  judgment  and  discretion,  and  if  the  facilities  at 
hand  for  conducting  each  business  were  in  all  cases  perfect; 
then  speculation,  as  well  as  any  business,  would  show  bet- 
ter results  to  the  community.  One  of  the  duties  of  organ- 
ized speculation  is  to  fix  prices  upon  a  legitimate  com- 
mercial basis  and  to  provide  for  their  continued  adaptation 
to  the  movements  of  trade  and  industry.  It  must  be  con- 
fessed that  the  result  is  accomplished  but  indifferently. 
The  reason  is  principally  found  in  the  fact  that  the  similarity 
of  the  business  to  gambling  leads  into  the  market  all  kinds 
of  adventuring  traders  who  have  not  given  serious  and 


PRICES  — SOME  FALLACIES  CONSIDERED      139 

painstaking  study  to  the  question  of  the  fluctuations  of 
prices  and  market  movements. 

Some  of  the  important  movements  of  prices  under  organ- 
ized speculation  are  due  to  the  trading  of  the  amateurs  or  ' 
unskilled  operators  just  mentioned.  The  great  number  of 
purchases  and  sales  that  they  make,  most  of  them  being 
based  solely  on  mere  whim  or  caprice,  causes  an  exceed- 
ingly erratic  market  with  numerous  rapid  minor  declines 
and  advances.  But  the  professional  speculators,  many  of 
whom  deal  in  the  actual  commodities,  have  sufficient  nerve 
and  skill  to  anticipate  the  larger  reactions  and  cycles  and  so 
to  narrow  down  many  of  the  wider  swings  of  the  market 
and  keep  it  within  closer  limits. 

The  natural  tendency  of  speculative  markets  is  toward 
bullishness;  but  the  advances  engineered  upon  the  ex- 
changes are  continually  cut  short  by  the  action  of  bear 
speculation  and  the  supply  of  actual  commodities  and 
securities.  The  speculative  prices  of  commodities  and 
securities  seldom  fall  below  their  cost  of  production;  but  a 
legitimate  price  is  reached,  usually  several  times  during  the 
year,  which  permits  the  commodity  to  pass  into  consump- 
tion and  the  security  to  be  purchased  by  careful  investors. 
A  market  in  which  speculation  is  organized  consists  of  a 
number  of  advances  from  the  natural  consumption  or 
export  point  and  back  to  that  point.  This  natural  tendency 
toward  bullishness  in  speculation  is  so  important,  and  the 
number  of  speculative  deals  so  largely  overshadow  the 
transactions  in  the  commodities  for  actual  use,  that,  even 
at  harvest-time,  when  the  larger  part  of  a  crop  is  being 
marketed,  there  is  little  more  tendency  toward  decline  than 
at  any  other  period  of  the  year.  The  charge  made  against 
organized  speculation  that  it  depresses  prices  is  utterly 
unfounded;  and  the  most  cursory  examination  would  prove 
the  absurdity  of  the  proposition.  Those  who  charge  that  it 
advances  prices,  however,  are  more  logical. 

As  a  price  regulator,  therefore,  organized  speculation  has 


140        VALUE  OF  ORGANIZED  SPECULATION 

some  excellences  mixed  with  serious  faults.  Organization 
tends  to  make  any  activity  more  effective;  and  the  princi- 
pal task  accomplished  by  the  speculator,  whereby  he  stops 
a  decline  by  his  purchases  and  an  advance  by  his  sales,  is 
facilitated  by  giving  him  the  opportunity  not  only  to  buy 
before  he  sells,  but  also  to  sell  before  he  buys.  On  the  other 
hand,  the  extreme  ease  with  which  a  deal  may  be  made 
upon  a  speculative  exchange  and  the  small  capital  required 
are  attractive  influences  upon  the  unskilled  speculators, 
whose  operations  cause  most  of  the  confusion  and  erratic 
<  fluctuations  seen  in  speculative  markets.  These  amateur 
;  speculators,  while  losing  their  own  money,  derange  the 
market,  creating  tendencies  which  even  the  wealthy  pro- 
fessional speculators  only  partially  overcome. 


CHAPTER  IV 

INDIRECT  EFFECTS 

A  Continuous  Market 

THOSE  who  trade  upon  the  exchanges  are  directly  subject 
to  the  effect  upon  their  fortunes  of  the  prices  which  are 
continually  being  made.  But  the  market  which  is  thus  pro- 
vided is  taken  advantage  of  by  different  persons  in  the 
community;  and  exchange  trading  has  its  effect  in  the  most 
remote  and  unexpected  places. 

Commodities  and  securities  in  which  there  is  organized 
speculation  are  provided  during  exchange  hours  with  a 
continuous  market,  and  the  difference  between  successive 
quotations  is  not  nearly  so  great  as  in  the  unorganized 
markets.  The  producer  of  wheat,  for  example,  may  be 
assured  that,  if  he  rejects  an  offer  for  his  crop,  the  market 
will  not  recede  from  his  reach  except  by  gradual  move- 
ments which  are  seldom  more  than  a  fraction  of  a  cent  at  a 
time.  Even  if  the  price  should  have  an  extreme  decline, 
there  will  be  abundant  opportunity  for  him  to  sell  his 
product  on  the  way  down. 

The  market  for  real  estate  is  unorganized,  and  is  quite 
different  in  its  workings.  The  price  of  land  or  any  other 
kind  of  real  property  may  be  boomed  in  the  same  way  as 
any  speculative  favorite  upon  the  exchanges.  But  in  real 
estate,  when  the  advance  has  spent  itself,  we  find  that  fre- 
quently there  will  be  a  sudden  change  and  the  property 
become  unsalable.  As  the  saying  is,  real  estate  under  such 
circumstances,  "cannot  be  given  away." 

The  reason  for  this  difference  is  that  real  estate  cannot  be 
made  the  subject  of  organized  speculation.  Each  piece  of 
land  has  its  separate  characteristics,  and  a  certain  formal- 


142        VALUE  OF  ORGANIZED  SPECULATION 

ity  in  making  transfers  is  necessary;  whereas  organized 
speculation,  as  it  exists,  requires  that  the  commodity 
traded  in  be  sufficiently  uniform  in  character  so  that  it  can 
be  graded,  and  that  there  be  no  obstacle  to  facility  of 
transfer. 

So  highly  is  a  continuous  market  esteemed  by  business 
men  that  they  will  even  select  a  commodity  for  production 
which  is  subject  to  great  uncertainties,  provided  it  has  the 
advantage  of  being  traded  in  upon  the  speculative  ex- 
changes. An  illustration  of  such  selection  and  its  effect  in 
determining  the  industries  of  a  country  is  commonly  seen 
among  the  farmers  on  our  Western  prairies.  The  home- 
steader or  new  settler,  if  he  be  poor  or  in  debt,  will  fre- 
quently put  his  land  into  wheat  —  not  in  every  instance 
because  he  thinks  that  a  single  crop  will  pay  better  than 
mixed  husbandry,  but  because  he  believes,  as  he  expresses 
it,  that  wheat  is  a  "cash  crop."  In  other  words,  there  is  a 
continuous  market  for  it  upon  the  exchanges,  and  there  is 
always  a  demand  from  speculators,  even  though  the  buyers 
for  milling  or  export  may  hold  off.  The  local  buyer,  in  the 
case  of  a  commodity  which  has  a  continuous  market  upon 
the  exchanges,  is  always  ready  to  make  an  offer  based  on 
the  exchange  quotations,  which  appear  at  all  seasons  of  the 
year  and  never  show  the  sudden  sweeps  in  price  so  often 
seen  in  the  case  of  non-speculative  commodities.  But  if  the 
farmer  resorts  to  mixed  husbandry,  he  may,  or  he  may  not, 
find  a  market  for  his  crops. 

In  the  matter  of  making  loans  upon  collateral  security, 
the  advantage  of  the  continuous  market  is  obvious;  for,  if 
the  lender  be  offered  a  security  that  he  can  readily  realize 
upon,  he  can  do  business  with  safety  to  himself,  and  he  will 
grant  the  loan  upon  favorable  terms.  It  is,  therefore,  with 
sound  reason  that  the  banks  of  Chicago  have  repeatedly 
signed  remonstrances  to  Congress  when  anti-option  laws 
were  proposed,  and  have  stated  in  memorials  that  the  pre- 
sent system  of  lending  money  upon  elevator  receipts  was  an 


INDIRECT  EFFECTS  143 

excellent  one,  and  that  dealing  in  futures  upon  the  board  of 
trade  was  the  best  safeguard  for  the  system.  The  banks  of 
New  Orleans  also  have  been  equally  emphatic  in  commend- 
ing the  trading  in  options  upon  the  cotton  exchanges  as  in- 
creasing the  safety  of  lending  upon  warehouse  receipts;  and 
the  bankers  of  other  cities,  including  New  York,  have 
signed  similar  memorials  indorsing  the  present  system.1 

As  regards  stocks  and  securities,  the  continuous  quota- 
tions and  liquidity  afforded  by  the  exchanges  stand  at  the 
very  foundation  of  our  financial  system.  Stocks  and  bonds 
whose  values  have  been  tested  by  organized  speculation 
are  considered  excellent  collateral  for  loans,  as  they  always 
have  a  value  if  offered  for  sale  upon  the  stock  exchange. 
This  value  renders  them  of  great  service  in  conducting  large 
financial  operations,  and  especially  in  making  payments  in 
international  trade.  Furthermore,  the  fact  that  money  can 
be  borrowed  upon  securities  renders  it  oftentimes  unneces- 
sary to  sell  them  even  at  a  time  of  panic;  for  the  banks  are 
able,  if  excellent  collateral  be  offered  and  the  panic  be  not  a 
serious  one,  to  credit  loans  on  their  books,  thus  giving 
important  relief  in  case  of  financial  strain. 

The  advantage  of  an  investment  which  can  be  quickly 
turned  into  money  is  widely  appreciated;  and  it  is  the  cus- 
tom of  financial  institutions,  as  well  as  of  individuals,  to 
send  surplus  funds  to  Wall  Street  in  order  that  they  may  be 
directly  or  indirectly  invested  in  securities,  or  loaned  upon 
them.  Something  can  be  said  upon  the  other  side  in  this 
matter,  and  this  preference  for  the  financial  markets  as  a 
place  of  temporary  investment  has  been  severely  criticized 
by  some,  as  they  claim  it  results  in  taking  capital  from  local 
industries  and  in  placing  it  under  the  control  of  the  great 
manipulators  of  finance.  But,  in  a  broader  view,  the  send- 
ing of  funds  to  the  centres,  where  they  are  placed  in  stock 
exchange  securities,  appears  as  one  of  the  few  elastic  fea- 
tures of  our  financial  system.  Wall  Street  does  not  get  the 
1  Cf.  Congressional  Record,  vol.  23,  part  7,  p.  6563. 


144        VALUE  OF  ORGANIZED  SPECULATION 

investments  of  the  country  except  when  it  offers  attractive 
terms  for  them.  The  people  want  a  place  to  which  they  can 
send  their  surplus  funds,  drawing  interest  upon  them,  and 
at  the  same  time  have  good  assurance  that  they  can  termin- 
ate the  investment  and  get  their  money  back  whenever 
they  wish  it.  Under  certain  conditions,  Wall  Street  is  the 
only  place  at  which  this  service  can  be  performed  for  large 
masses  of  capital;  and,  by  its  help,  the  banks  and  financial 
institutions  are  placed  in  such  a  position  that  they  can  do  a 
like  service  for  others.  It  is  not  a  question  of  whether  our 
central  reserve  city  banks  constitute  the  best  instrumental- 
ity for  holding  the  reserves  of  the  smaller  banks.  Without 
the  market  furnished  by  organized  speculation,  the  terms 
on  which  they  would  hold  the  reserves  of  the  country  banks 
would  not  be  so  favorable  as  those  at  present  granted. 

When  the  finances  of  the  country  are  subjected  to  strain, 
the  ultimate  burden  comes  upon  the  securities  market; 
and,  remembering  that  it  gets  little  assistance  from  any 
quarter,  the  wonder  is  that  panics  are  so  few.  It  is  the 
thousands  of  traders  continually  buying  and  selling  by 
means  of  the  facilities  afforded  by  organized  speculation, 
who  make  the  market  in  which  the  disquieting  results  of 
ill-judged  business  ventures  are  finally  liquidated. 

Panics 

Notwithstanding  these  facts,  the  stock  exchange  is 
accused  of  producing  panics.  No  doubt  the  reason  for  this 
accusation  is,  that,  in  time  of  financial  crisis,  it  is  the  place 
most  prominently  mentioned.  All  eyes  are  turned  to  it; 
and,  very  soon  after  conditions  have  been  adjusted  in  Wall 
Street,  outside  commerce  shows  improvement.  Yet  it  is  not 
strange  that  monetary  disturbances  should  be  most  notice- 
able at  the  financial  centre.  Commerce  and  finance  are 
subject  to  disorder  in  the  same  way  that  all  things  human 
are;  and,  when  unsound  conditions  are  disclosed,  the  insti- 
tution whose  proper  function  it  is  to  guard  the  finances 


INDIRECT  EFFECTS  145 

of  the  country  naturally  becomes  prominent.  The  stock 
exchange  should  not  be  blamed  because  it  is  all  activity  at 
such  a  tune  and  doing  its  duty  in  the  midst  of  the  disturb- 
ance. As  well  might  we  say  that  a  hospital  is  the  cause  of 
disease  because  there  are  so  many  sick  people  within  its 
walls. 

The  exchange  also  is  unfortunate  in  regard  to  some  of 
the  financial  interests  associated  with  it.  For  almost  in- 
distinguishable from  its  membership  are  those  who  take 
advantage  of  its  facilities  in  order  to  gain  indemnity  for 
reckless  and  dishonest  transactions.  The  broker  cannot 
enter  into  all  the  affairs  of  his  client;  and,  when  business  is 
offered  him,  he  accepts  it  as  any  one  does  under  similar  cir- 
cumstances, provided  there  is  nothing  that  appears  wrong 
on  its  face.  Occasionally  there  will  occur  wide  and  sensa- 
tional fluctuations  in  the  price  of  a  security  upon  the  stock 
exchange,  implying  manipulation  from  some  quarter. 
When  such  manipulation  occurs  outside  of  an  exchange, 
nothing  is  done  or  can  be  done  except  through  the  doubtful 
and  tardy  expedient  of  legislative  action.  Upon  the  stock 
exchange,  such  manipulation  is  made  the  subject  of  in- 
quiry; and,  if  members  of  the  exchange  are  the  cause  of  it, 
they  are  promptly  disciplined.  However,  it  is  too  often 
found  to  be  the  case  that  the  real  cause  of  the  disturbance 
comes  from  traders  who  are  not  members  of  the  exchange 
and  hence  are  outside  the  jurisdiction  of  its  authorities. 
The  financial  leaders  who  cause  much  of  the  trouble  are 
often  vociferous  in  attributing  the  disturbance  to  the  insti- 
tution that  saved  them. 

Amateurism  again 

In  this  connection  it  becomes  important  further  to 
examine  the  question  as  to  whose  trading  it  is  that  fur- 
nishes the  enormous  number  of  transactions  that  go  to 
make  up  the  continuous  market.  One  of  the  agencies  is 
seen  in  the  fact  that  the  system  of  organized  speculation 


146        VALUE  OF  ORGANIZED  SPECULATION 

brings  together  all  dealers  who  wish  to  trade  in  a  particular 
commodity  or  security ;  and  hence,  in  such  an  assembling  of 
different  interests  and  wishes,  there  is  greater  likelihood  of 
finding  some  one  who  will  accept  a  particular  proposition 
than  in  case  the  different  units  be  more  widely  separated. 
The  modern  commercial  world  is  a  large  one,  and  the  num- 
ber of  business  men  is  being  continually  increased.  Hence, 
when  those  who  may  wish  to  buy  or  sell  on  particular  terms 
throughout  the  country  are  concentrated  in  a  certain  place, 
the  volume  of  transactions  may  be  very  large,  and  a  wide 
range  given  to  the  number  of  propositions  which  may  be 
made  with  a  good  chance  of  being  accepted. 

Moreover,  it  may  be  said  in  answer  to  many  writers  who 
carefully  calculate  the  number  of  times  that  a  commodity 
is  sold  and  re-sold  upon  the  New  York  Produce  Exchange, 
for  instance,  that  such  repeated  dealing  is  not  necessarily 
illegitimate  or  of  a  gambling  nature.  These  writers,  to  be 
consistent,  should  adopt  in  its  entirety  the  doctrine  of  so- 
cialism, which  looks  with  horror  upon  gainful  trade.  How- 
ever, for  those  who  believe  that  trading  is  one  of  the  na- 
tural agencies  by  which  commodities  are  distributed  from 
producer  to  consumer,  a  different  view  may  consistently 
be  taken.  Furthermore,  the  fact  that  a  commodity  may  be 
handled  a  number  of  times  upon  the  floor  of  the  exchanges 
is  matched  by  the  fact  that,  in  the  modern  process  of  manu- 
facture, a  commodity  must  be  handled  a  number  of  times 
in  order  to  get  the  benefit  of  the  greatest  division  of  labor. 
The  exact  number  of  times  is  not  the  essential  thing  in 
either  case.  It  is  sufficient  if  we  note  that,  with  division  of 
labor  or  any  specialization  of  functions,  the  tendency  is  for 
the  number  of  persons  engaged  to  increase;  whether  it  be 
in  production,  strictly  considered,  or  in  the  distributive 
process  as  well,  or  whether  it  be'in  a  conceivable  socialistic 
state,  or  in  a  state  where  individualism  prevails. 

Having  disabused  our  minds  of  the  idea  that  an  arithme- 
tical calculation  is  the  best  method  to  pursue  in  arriving  at 


INDIRECT  EFFECTS  147 

a  conclusion  as  to  the  proper  number  of  times  that  a  com- 
modity be  handled  or  transferred,  the  other  side  of  the 
argument  should  be  examined;  and  we  should  not  blink 
the  fact  that  the  enormous  number  of  deals  upon  the  ex- 
changes is  largely  made  up  of  the  mere  adventuring  trades 
of  the  amateurs  led  into  the  market  by  the  gambling  spirit. 

It  is  the  same  with  speculation  as  with  any  business,  —  in 
a  broad  sense  the  successful  producer  who  makes  money  for 
himself  has  the  best  effect  as  a  social  factor;  nevertheless, 
in  some  minor  respects,  the  business  community  may  pro- 
fit even  from  disaster.  The  flotsam  and  jetsam  of  com- 
merce may  help  some  persons  at  the  same  time  that  the 
nation  as  a  whole  is  made  poorer  by  the  wrecking  of  its 
valuable  fleets. 

In  the  futile  struggles  of  the  amateur  speculators  result- 
ing from  their  unwise  ventures,  which  are  directly  and  in- 
directly a  tremendous  economic  loss  to  the  community  con- 
sidered as  a  whole,  we  still  have  the  compensating  fact  that 
their  numerous  trades  supply  most  of  the  volume  of  the 
continuous  market.  There  would  be  a  broad  market  in  any 
case  from  the  mere  concentration  of  a  wide  area  of  deals  in 
a  particular  exchange;  but  it  would  not  be  nearly  so  broad 
as  the  market  that  now  exists,  where  there  is  this  active 
participation  of  the  outside  element.  This  is  readily  seen 
if  we  look  at  the  number  of  transactions  in  a  stock  which  is 
the  subject  of  great  interest  and  speculation  by  the  unin- 
formed. 

Almost  all  of  the  important  questions  which  are  to  be 
considered  in  determining  the  value  of  organized  specula- 
tion centre  about  the  activities  of  the  amateur  speculators. 
Their  pathological  mental  condition  must  be  carefully 
studied  in  order  to  arrive  at  any  correct  conclusion.  They 
are  especially  important  in  America,  as  speculation  in  the 
organized  markets  is  much  more  common  here  than  else- 
where. In  discussing  the  results  of  their  activity  Professor 
Emery  says:  — 


148        VALUE  OF  ORGANIZED  SPECULATION 

"The  question  must  be  faced  of  the  effect  of  eliminating 
the  public  from  the  speculative  market  even  if  it  could  be 
accomplished.  It  is  sometimes  supposed  that  such  a  result 
would  be  all  benefit  with  no  injury.  On  the  contrary,  the 
real  and  important  function  of  speculation  in  the  field  of 
business  can  only  be  performed  by  a  broad  and  open  market. 
Though  no  one  would  defend  individual  cases  of  reckless- 
ness, or  fail  to  lament  the  disaster  and  crime  sometimes 
engendered,  the  fact  remains  that  a  *  purely  professional 
market'  is  not  the  kind  of  market  which  best  fulfills  the 
service  of  speculation.  A  broad  market  with  the  partici- 
pation of  an  intelligent  and  responsible  public  is  necessary. 
The  writer  ventured  this  opinion  some  years  ago  at  the 
cost  of  considerable  criticism.  The  German  experience 
would,  however,  seem  to  bear  it  out.  A  narrow  professional 
market  is  less  serviceable  to  legitimate  investment  and 
trade,  and  much  more  susceptible  of  manipulation." 1 

While  hesitating  to  express  an  opinion  contrary  to  that 
of  an  economist  who  has  done  pioneer  work  in  a  difficult 
field,  thus  rendering  it  easier  for  those  who  follow,  and 
while  acknowledging  in  this  place  his  obligation  to  the  work 
of  Professor  Emery,  the  present  writer  ventures  to  say  that 
the  lack  of  skill  and  the  recklessness  of  the  amateur  specu- 
lator should  be  bluntly  stated  and  unsparingly  exposed. 
The  important  consequences  of  his  psychological  condition 
should  be  traced  and  recognized,  since  they  affect  power- 
fully the  value  of  organized  speculation. 

Recurring  to  the  excerpt  given  above,  it  recognizes,  as  it 
should,  that  the  broad  market  of  the  exchanges  is  due  in 
great  part  to  the  participation  of  the  public;  but,  at  the 
same  time,  the  implication  is  given  that  it  is  possible  for 
the  public  or  the  mass  of  unskilled  speculators  to  operate 
intelligently  in  the  market.  The  present  writer,  however, 
takes  the  position  that  the  public  as  such  is  not  competent 
to  engage  in  any  form  of  business.  Every  form  of  produc- 
1  Cf.  Yale  Review,  vol.  17,  p.  21. 


INDIRECT  EFFECTS  149 

tion  or  distribution,  whether  it  be  of  the  nature  of  agricul- 
ture, manufacturing,  or  merchandising,  should  be  under- 
taken only  by  specialists  in  their  several  lines.  The  public 
should  not  engage  in  business  except  as  each  individual, 
through  division  of  labor  and  specialization  of  functions, 
operates  in  a  particular  field  in  which  he  has  some  aptitude 
and  training. 

Among  all  callings  the  one  to  which  it  is  especially  diffi- 
cult for  the  average  person  to  adapt  himself,  is  that  of  spec- 
ulation. There  is  not  one  in  a  thousand,  it  might  almost 
be  said  that  there  is  not  one  in  a  hundred  thousand,  who 
possesses  that  modicum  of  good  judgment,  that  level- 
headedness, that  most  uncommon  form  of  common  sense, 
which  goes  to  make  up  the  mental  equipment  of  the  true 
speculator.  The  speculator  must  have  the  faculty  of  look- 
ing through  all  the  conditions  which  affect  the  determining 
price-making  factor  in  a  particular  case.  He  must  be 
neither  an  optimist  nor  a  pessimist.  If  there  be  any  calling 
which  requires  that  things  be  seen  as  they  are,  without  any 
mental  coloring,  either  to  make  them  appear  better  or 
worse,  it  is  that  of  the  speculator.  He  must  be  capable  of 
broad  synthesis,  so  that  he  can  properly  place  the  particu- 
lar commodity  that  he  has  in  view  as  forming  a  part  of  the 
whole  mass  of  commodities  in  price  relations;  and,  at 
the  same  time,  he  must  be  capable  of  the  most  unsparing 
analysis  of  the  price-making  factors  which  control,  or  are 
supposed  to  control,  in  any  particular  field. 

If  the  above  view  of  the  speculator  be  correct,  then  ama- 
teurs have  few  indeed  of  the  requisite  qualifications.  It  is 
not  denied  that  they  may  be  eminent  in  art,  music,  or  even 
in  some  form  of  business  which  they  know;  but  it  is  plain 
that  they  do  not  understand  speculation,  else  they  would 
follow  it  with  better  success.  The  best  place  to  study  the 
peculiar  attainments  and  general  mental  condition  of  the 
amateur  speculator  is  in  the  broker's  office.  Let  the  investi- 
gator approach  one  of  them  in  such  a  place,  get  acquainted 


150        VALUE  OF  ORGANIZED  SPECULATION 

with  him,  and  draw  from  him  his  life  story.  If  he  be  an  old 
trader,  it  will  usually  be  found  that  he  was  at  one  time 
prosperous  and  that  he  lost  his  property  as  a  result  of 
speculation.  If  he  be  a  beginner,  it  will  in  all  likelihood 
appear  that  he  is  filled  with  a  confidence  in  undertaking 
something  that  he  does  not  understand  which  is  extremely 
ridiculous  in  view  of  the  probability  of  his  failure. 

Shifting  the  conversation,  ask  your  acquaintance  what 
he  thinks  of  the  market.  Here  the  absurdity  of  his  posi- 
tion will  be  even  more  noticeable.  It  will  be  seen  that  he 
depends  upon  gossip  and  superstition,  and  that  there  is 
little  which  is  rational  about  his  talk.  He  believes  that  he 
has  what  is  called  a  "tip  "  from  some  insider,  or  that  he  has 
been  able  to  ascertain  the  intentions  of  the  "big  men"  who 
are  supposed  to  dictate  matters.  But  more  likely  than  be- 
ing a  victim  of  tipsters,  the  adventuring  speculator  will  be 
revealed  as  a  follower  of  the  most  absurd  superstitions.  He 
believes  that  a  certain  number  of  days  after  a  particular 
quotation  is  made,  a  certain  market  movement  will  take 
place.  He  believes  that  certain  days  of  the  week  or  month 
are  lucky  or  unlucky;  or  that  if  a  particular  quotation  is 
posted  at,  say  10.30,  it  will  be  an  important  indication  as  to 
the  day's  fluctuations.  Or  perhaps  the  opening  range  ap- 
pears to  him  as  the  determining  influence;  and  he  will  care- 
fully watch  to  see  whether  the  first  figure  of  the  range  that 
comes  out  on  the  tape  is  higher  or  lower  than  the  second 
one.  This  fact  will  be  pointed  to  as  an  important  indica- 
tion of  the  movement  of  prices  for  days  in  advance.  Any 
absurdity,  even  of  the  most  superstitious  character,  may 
be  found  as  a  part  of  his  mental  equipment.  That  the 
above  description  of  the  ordinary  adventuring  speculator 
is  true  can  be  ascertained  by  any  one  who  will  take  the 
trouble  to  become  acquainted  with  him.  His  activities  are 
the  merest  attempts  of  the  tyro  to  do  something  which  he 
does  not  understand;  and  in  cases  where  he  has  had  expe- 
rience, he  learns  nothing  from  it. 


INDIRECT  EFFECTS  151 

Summing  up  this  subdivision  of  the  question:  it  would 
appear  that  by  the  mere  concentration  within  the  walls  of 
an  exchange  of  numerous  interests  which  would  otherwise 
be  separated,  and  by  the  participation  of  speculators  who 
know  their  business,  a  broad  and  continuous  market  is 
given  of  great  service  to  all  interests.  By  reason  of  the  vol- 
ume of  trading  by  amateurs  or  unskilled  speculators,  how- 
ever, the  market  is  made  much  broader  than  it  otherwise 
would  be;  but  the  good  that  is  thus  accomplished  is  more 
than  offset  by  the  artificial  markets  and  eccentric  fluctua- 
tions caused  by  unwise  speculative  operations.  Any  good 
effects  of  the  participation  in  the  markets  by  amateurs 
should  be  availed  of  as  a  partial  offset  to  the  harm  that 
they  do,  but  the  market  would  be  sufficiently  broad  for  all 
practical  purposes  without  their  help.  The  participation 
of  the  unskilled  is  no  more  desirable  in  speculation  than 
it  is  in  any  other  form  of  human  activity. 

Hedging 

In  hedging,  the  speculative  markets  are  brought  into 
such  relation  to  the  general  business  community  that  they 
perform  a  function  akin  to  that  of  insurance;  but  many 
persons  cannot  understand  this  connection  or  this  process. 
They  say,  and  say  truly,  that  in  the  trading  in  futures 
there  are  few  deliveries  of  the  actual  commodity.  If  a 
miller  sells  wheat  for  future  delivery  upon  the  board  and 
afterwards  buys  in  that  wheat,  letting  the  one  transaction 
check  off  against  the  other,  these  critics  of  organized  specu- 
lation point  triumphantly  to  the  fact  that  in  this  transac- 
tion there  has  been  no  delivery  of  actual  wheat.  Yet  the 
miller  in  making  the  deal  may  not  be  speculating.  He  may 
in  reality  be  taking  advantage  of  the  fact  that  others  are 
doing  the  speculating  for  him  and  performing  a  service 
similar  in  its  essentials  to  the  service  which  an  insurance 
company  undertakes  for  its  policy  holders. 

For  instance,  the  miller,  at  the  time  when  the  farmer 


152        VALUE  OF  ORGANIZED  SPECULATION 

brings  his  crop  to  market,  may  be  offered  an  abundance  of 
wheat  of  the  grades  which  it  would  be  practicable  for  him 
to  use  in  milling  for  his  trade,  and  at  such  a  price  that  he 
could  use  it  with  profit.  But  the  process  of  milling  is  not 
an  instantaneous  one,  and  wheat  and  flour  both  fluctuate 
rapidly  in  value.  Long  before  he  has  his  year's  supply  of 
wheat  milled,  there  may  have  been  the  widest  fluctuations 
in  the  market  for  flour.  It  might,  for  instance,  decline 
heavily  to  such  a  price  that  there  would  be  no  profit  in 
further  milling.  Under  the  system  of  specialization  whereby 
the  speculator  runs  the  risk  of  changes  in  price,  the  miller 
has  that  particular  department  of  his  business  taken  in 
hand  by  another;  and  he  is  thus  able  to  specialize  more 
completely  in  operating  his  mill  and  marketing  his  product. 
The  manner  in  which  this  is  done  is  as  follows :  — 

Let  us  suppose  that  the  miller  had  laid  in  a  supply  of 
100,000  bushels  of  wheat  for  a  year's  milling.  He  then  sells 
the  same  amount  of  wheat  for  future  delivery  in  Chicago. 
When  he  does  this,  he  has  in  mind  the  fact  that  cash  wheat, 
future  wheat,  and  flour  all  sympathize  with  one  another  in 
price,  and  may  be  depended  upon,  with  few  exceptions,  to 
move  together.  Hence,  should  the  price  of  flour  and  wheat 
decline,  in  all  probability  the  price  of  futures  would  de- 
cline also;  and  the  miller  will  close  out  his  wheat  futures, 
the  profit  in  them  compensating  for  his  losses  owing  to  the 
decline  in  the  value  of  flour.  This  he  does  as  the  season 
progresses,  gradually  closing  his  short  wheat  as  he  sells  his 
flour,  thus  keeping  short  of  futures  to  about  the  amount  of 
his  stock  of  wheat  and  flour. 

A  miller  who  has  hedged  in  this  way  may  be  quite  indif- 
ferent to  the  fluctuations  of  the  market.  He  has  not  elimin- 
ated all  of  his  business  risks,  but  he  has  almost  completely 
eliminated  those  risks  which  come  from  changes  in  price. 
Yet  he  is  manufacturing  and  holding  commodities  whose 
values  are  most  uncertain,  operations  which  might  other- 
wise subject  him  to  losses  such  as  he  could  ill  afford  to  bear. 


INDIRECT  EFFECTS  153 

This  process  is  a  little  different  from  insurance  in  other 
forms  of  business,  but  the  principle  of  it  is  the  same.  It  is 
the  transfer  of  risks  by  specialization  in  exercising  business 
functions,  and  helps  to  cut  down  costs  as  truly  as  any 
method  of  systematizing  production.  The  illustration 
given  above  is  only  one  form  of  hedging;  but  the  principle 
is  of  wide  applicability  and  subject  to  almost  infinite  varia- 
tion. Again  considering  the  case  of  the  miller,  he  has,  let 
us  say,  the  opportunity  to  enter  into  an  advantageous  con- 
tract whereby  he  may  bind  himself  to  deliver  a  quantity  of 
flour  at  different  times  in  the  future.  But  he  does  not  at 
present  own  the  wheat  necessary,  and  has  not  sufficient 
facilities  for  storing  it  if  he  should  buy  it  at  present  prices. 
By  using  the  markets  furnished  by  organized  speculation 
as  a  hedge,  he  may  have  his  margin  of  profit  in  the  opera- 
tion of  milling  guaranteed  to  him.  The  manner  in  which 
he  does  this  is  very  simple.  He  buys  wheat  for  future  de- 
livery upon  the  board  of  trade  to  an  amount  sufficient  to 
make  the  flour  that  he  has  contracted  to  deliver.  Then  he 
buys  actual  wheat  by  sample  of  the  quality  that  he  wishes 
or  of  different  grades,  so  that  he  may  mix  and  grind  to  ad- 
vantage. But  at  the  same  time  that  he  buys  the  wheat  for 
actual  milling,  he  sells  an  equivalent  amount  of  his  future 
wheat.  Hence,  if  the  price  of  spot  wheat  should  so  advance 
that  his  profit  on  milling  were  cut  down,  the  profit  on  the 
futures  that  he  previously  bought,  and  is  now  continually 
selling,  would  make  his  losses  good. 

It  is  to  be  noted  in  the  illustration  given  that  the  miller 
is  not  insisting  upon  delivery  of  the  actual  wheat  due  him 
on  his  futures.  He  could  so  demand  it  and  such  demands 
are  often  made;  but  there  is  this  objection  to  his  pursuing 
that  course.  The  wheat  that  he  would  receive  on  delivery 
might  not  be  the  best  grade  or  grades  for  the  particular 
purpose  in  hand.  Then  it  may  be  that  he  was  hedging  in 
Chicago  or  Minneapolis,  while  his  mill  was  located  at,  say, 
Winona  or  Fargo.  In  such  case  it  would  usually  be  more 


154        VALUE  OF  ORGANIZED  SPECULATION 

advantageous  to  buy  the  wheat  of  local  farmers  or  grain 
dealers  and  use  his  futures  upon  the  exchange  merely  as 
an  insurance  policy,  simply  as  a  device  for  guaranteeing 
profits  upon  his  contract  to  deliver  flour. 

The  method  of  hedging  explained  above  is  by  no  means 
confined  to  the  flour  miller.  The  cotton  spinner  hedges 
according  to  precisely  the  same  principle;  and  those  who 
manufacture  corn  and  oats  into  different  products  also  re- 
sort to  it.  In  short,  any  manufacturer,  whose  raw  mate- 
rial is  of  such  uncertain  value  that  it  is  traded  in  according 
to  the  future  system  on  the  exchanges,  may  use  it. 

The  exporter  or  dealer  in  a  speculative  commodity 
hedges  in  a  similar  manner.  The  local  buyer  will  be  in- 
formed by  telegraph  as  to  the  price  for  futures  of  his  com- 
modity, and,  after  buying  of  the  producer  at  a  price  so 
fixed,  with  due  allowance  for  transportation,  he  hedges  by 
making  a  sale  for  future  delivery  upon  the  exchange.  This 
reduces  the  buying  of  the  commodity  to  almost  an  exact 
science,  and  gives  to  the  merchant  the  ordinary  profits  that 
go  to  the  dealer,  relieving  him  at  the  same  time  of  import- 
ant risks  which  he  would  be  obliged  to  bear  if  he  were  not 
insured  against  fluctuations  of  price  in  the  world  market. 
Elevator  companies  and  buyers  of  commodities  send  out 
bids  based  on  the  price  for  futures,  while  exporters  and 
foreign  buyers  cable  bids  based  on  the  same  source  of 
information. 

Warehousemen  and  owners  of  elevators  use  a  similar 
system.  An  elevator,  for  example,  may  not  have  received 
from  holders  of  wheat  a  sufficient  quantity  of  the  cereal  to 
fill  it.  The  owner  in  that  case  has  a  method  by  which  he 
can  fill  his  elevator  and  so  earn  storage  charges.  He  pro- 
ceeds first  to  buy  wheat  from  farmers  and  others,  incid- 
entally, be  it  noted,  bidding  up  the  price  when  wheat  is 
coming  to  market.  But  elevator  companies  are  not  well 
adapted  to  enter  into  the  business  of  speculating  in  wheat, 
and  their  owners  do  not  wish  to  run  the  risks  of  fluctuations 


INDIRECT  EFFECTS  155 

in  price.  To  be  a  dealer  in  wheat  in  that  way  —  to  buy 
a  stock  of  it  and  sell  it  at  the  time  when  it  is  thought  most 
advantageous  —  is  quite  different  from  merchandising  in 
commodities  of  more  stable  value.  Hence  the  elevator 
owner  takes  advantage  of  the  facilities  furnished  by  or- 
ganized speculation.  He  finds  upon  the  speculative  ex- 
changes traders  who  are  willing  to  run  these  risks  for  him 
just  as  he  finds,  in  the  offices  of  insurance  companies, 
persons  who  are  equipped  to  run  the  risks  of  fire,  or 
storm,  or  death.  In  hedging  against  price  fluctuations, 
however,  it  is  not  an  insurance  policy  that  is  used,  but  a 
contract  for  the  future  delivery  of  a  commodity.  When, 
for  instance,  there  is  a  large  quantity  of  wheat  in  store, 
the  more  distant  option  sells  at  a  higher  figure  than  the 
cash  commodity.  This  difference  constitutes  the  cost  of 
carrying  the  wheat  till  the  future  date.  Thus  by  selling 
according  to  the  future  system  and  delivering  the  wheat 
when  the  option  matures,  the  elevator  earns  storage  charges, 
and  incidentally  is  one  of  the  best  customers  which  the 
farmer  has  for  his  product  at  the  time  he  is  bringing  it 
to  market. 

The  above  are  but  a  few  illustrations  of  the  manner  in 
which  speculative  futures  can  be  used  in  different  parts  of 
the  process  of  handling  and  manufacturing  commodities. 
It  makes  no  difference  what  the  commodity  is;  the  business 
principle  in  hedging  is  the  same,  provided  only  that  there 
be  a  speculative  exchange  on  which  the  deals  may  be 
made. 

But  the  word  "hedge,"  used  in  this  connection,  is  not  in 
all  cases  restricted  to  the  idea  that  a  business  man  has 
protected  himself  in  such  a  way  that  his  hedging  deal  will 
necessarily  fluctuate  in  exactly  the  same  manner  as  his 
original  deal.  Indeed,  a  business  man  may  hedge  on  any 
form  of  business  venture  by  going  into  a  transaction  of  a 
different  nature,  trusting  that  both  ventures,  by  the  law  of 
chance,  will  not  go  against  him  at  once.  Inasmuch  as  the 


156        VALUE  OF  ORGANIZED  SPECULATION 

speculative  exchange  furnishes  the  only  continuous  market 
in  which  a  commodity  or  security  can  be  sold  at  any  time, 
it  is  the  ideal  place  for  hedging;  and  it  is  the  only  place  in 
which  a  business  man  who  fears  some  form  of  disaster  can 
so  hedge,  without  disposing  of  his  particular  investment, 
that  in  all  human  probability  he  may  save  a  part  at  least 
of  his  profits  in  case  his  direct  business  interests  are  un- 
fortunate. 

For  example,  let  us  suppose  a  manufacturer  engaged  in 
some  form  of  iron  or  steel  business.  His  interests  are  not 
exactly  identical  with  those  of  the  United  States  Steel  Corp- 
oration, but  they  are  approximately  so.  When  general  busi- 
ness is  excellent,  all  the  iron-working  plants  in  the  country 
are  put  in  service,  and  profits  are  good  both  for  large  and 
small  companies.  But  when  business  declines,  some  of  the 
more  poorly  equipped  plants  pass  out  of  service,  and  those 
that  continue  are  by  no  means  making  the  profits  that 
they  usually  do.  The  shares  of  the  United  States  Steel  Corp- 
oration reflect  in  then*  price  the  vicissitudes  of  the  steel 
and  iron  trade.  But  the  small  foundryman,  who  has  per- 
haps recently  improved  his  plant,  possibly  on  borrowed 
capital,  will  feel  the  need  of  some  form  of  hedge  whereby 
he  can  insure  himself  against  adverse  general  trade  condi- 
tions. He  needs  insurance  against  a  general  decline  in  busi- 
ness even  more  than  he  needs  fire  insurance;  and  this  is 
particularly  important  at  a  time  of  great  business  prosper- 
ity and  activity.  At  such  a  time  the  shares  of  the  United 
States  Steel  Corporation  are  likely  to  sell  at  a  higher  price 
than  they  do  in  times  of  panic;  and  the  foundryman,  in  the 
case  supposed,  might  well  hedge  by  selling  short  a  mod- 
erate number  of  the  shares  of  the  corporation.  If  business 
should  continue  good,  he  could  make  enough  profit  to  get 
his  house  out  of  debt  and  to  re-margin  his  short  sale  of  steel 
corporation  stock;  and,  by  waiting  till  some  period  of  busi- 
ness depression  sets  in,  he  could  cover  his  short  sale  at  a 
profit.  On  the  other  hand,  if  the  business  decline  set  in  soon 


INDIRECT  EFFECTS  157 

after  he  had  made  the  short  sale,  this  hedge  would  furnish 
perhaps  the  only  reliance  to  save  him  from  bankruptcy 
and  ruin. 

In  every  form  of  business  there  is  some  kind  of  stock 
which  can  be  sold  as  a  hedge  to  guard  against  a  general  de- 
pression in  trade.  The  owner  of  a  railroad  can  sell  the  stock 
of  other  railroads;  or  the  farmer  can  with  advantage  sell 
the  stock  of  a  railroad  which  serves  his  section  of  the  coun- 
try, because,  if  crops  in  his  vicinity  are  poor,  the  local  rail- 
road will  have  small  earnings  and  its  stock  will  decline.  In 
the  case  of  a  business  for  which  there  seems  to  be  no  par- 
ticular stock  which  it  is  especially  appropriate  to  sell,  a 
stock  which  in  some  degree  represents  the  general  business 
of  the  country,  such  as  that  of  the  United  States  Steel  Corp- 
oration, would  be  an  excellent  hedge. 

There  is  risk  in  every  form  of  business,  especially  in  one 
that  is  being  conducted  with  small  capital;  and  it  is  to  be 
regretted  that  the  knowledge  of  how  the  stock  exchange  can 
be  utilized  in  insuring  against  business  disaster  is  not  more 
widely  diffused.  At  present  it  is  only  the  large  business 
houses  that  are  in  sufficient  touch  with  Wall  Street  to  take 
advantage  of  this  form  of  hedging.  However,  there  are 
many  business  houses,  both  large  and  small,  that  see  the 
wisdom  of  holding  bonds  which  are  salable  on  the  stock 
exchange,  and  on  which  money  can  be  borrowed  with  facil- 
ity. Gilt-edged  bonds  do  not  have  great  declines  in  price 
during  panics;  hence  they  are  an  excellent  hedge  and  form 
the  safest  kind  of  a  reserve  against  disaster. 

A  business  man  who  has  such  a  reserve  in  the  shape  of 
bonds  is  in  an  enviable  position,  for  he  has  always  the 
continuous  market  furnished  by  organized  speculation  on 
which  to  dispose  of  them;  and,  if  panic  comes,  he  has  excel- 
lent collateral  on  which  to  borrow  money.  So  at  perilous 
times,  when  the  banker  informs  the  business  man,  not  so 
well  prpvided,  that  it  would  be  best  for  him  to  reduce  his 
line  of  credit,  the  business  man,  with  good  investment 


158        VALUE  OF  ORGANIZED  SPECULATION 

securities  in  his  tin  box,  can  furnish  collateral  and  so  in- 
crease his  line,  instead  of  being  obliged  to  diminish  it. 

The  value  of  a  business  reserve  in  the  form  of  securities  is 
further  increased  by  recent  legislation  which  allows  banks 
to  issue  notes  on  other  than  government  bonds.  Such  a 
reserve  is  better  than  one  in  vested  in  real  estate;  for  some 
forms  of  real  estate  are  considered  by  bankers  merely  as  an 
additional  burden  upon  a  borrower,  making  him  even  less 
able  to  fulfill  his  obligations.  It  is  better  than  to  have  it 
loaned;  for,  in  case  of  such  a  panic  as  that  of  1907,  the  best 
debtors  may  fail  to  keep  agreements. 

In  order  to  show  the  wide  field  of  possible  usefulness  of 
the  markets  furnished  by  organized  speculation,  let  us 
return  to  the  farmer  and  suppose  him  prosperous  with  a 
granary  full  of  wheat.  He  is  not  obliged  to  sell  his  wheat  at 
this  time,  because  he  has  sold  other  crops  and  has  enough 
funds  for  his  use.  But  he  has  his  granary  which  has  been 
built  at  considerable  expense  and  must  be  used  in  order  to 
get  the  benefit  of  his  investment.  There  is  a  way  in  which 
he  can,  with  his  little  granary,  go  into  the  warehousing  busi- 
ness as  a  hedge  upon  his  other  investments,  and  with  as 
great  safety  as  the  large  elevators  in  the  city.  If  he  will 
look  at  the  market  quotations  he  will  see  December  wheat 
selling  at,  say  $1,  and  wheat  for  May  delivery  selling  at,  say 
$1.06.  This  difference  of  six  cents  represents  the  cost  of 
carrying  the  wheat  from  December  to  May.  It  is  the  cus- 
tom of  the  elevator  owners  to  fill  their  warehouses  with  cash 
wheat  and  then  sell  against  it  for  future  delivery,  thus  mak- 
ing the  carrying  charge  as  above  explained;  and  our  small 
farmer  can  operate  on  exactly  the  same  plan  and  with  equal 
chances  of  success.  In  the  case  supposed  he  could  sell  the 
contents  of  his  granary  for  six  cents  more  per  bushel  for 
May  than  for  December  delivery.  Hence  he  has  but  to  sell 
for  May  delivery  upon  the  exchanges;  and,  when  that 
month  arrives,  he  finds  that  he  has  secured  a  profit  equal 
to  that  which  he  would  have  got  in  December  plus  the  six 


INDIRECT  EFFECTS  159 

cents  carrying  charge  as  just  stated.  The  above  instance  is 
not  speculation.  It  is  a  case  in  which  the  farmer  is  enabled, 
by  utilizing  the  exchange  markets,  to  go  into  the  ware- 
housing business  and  thus  make  a  hedging  investment 
against  his  more  risky  business  of  farming. 

No  attempt  will  be  made  here  to  multiply  instances  of 
the  manner  in  which  hedging  can  be  used  in  the  general 
field  of  business.  To  do  the  subject  complete  justice  would 
of  itself  require  a  lengthy  essay,  but  enough  has  been  given 
to  show  the  wide  range  in  which  hedging  operations  can  be 
conducted.  To  enter  into  the  subject  in  detail,  examining 
every  industry  separately,  and  then  to  point  out  in  each 
case  the  manner  in  which  the  speculative  markets  can  be 
used  to  make  regular  and  approximately  certain  the  busi- 
ness interests  of  those  who  do  not  wish  to  take  risks,  is  one 
of  the  most  hopeful  means  of  improving  the  condition  of 
the  people,  and  especially  of  building  up  the  body  of  inde- 
pendent business  men  and  furnishing  a  means  whereby  they 
may  compete  on  equal  terms  with  the  large  corporations 
and  business  houses. 

The  task  just  outlined  would  be  a  crowning  one,  and 
would  be  important  in  the  development  of  the  process  of 
specialization  of  functions,  for  it  would  be  the  setting-off 
of  the  risk  takers  so  that  those  who  are  not  in  a  position  to 
take  risks  could  throw  them  upon  the  shoulders  of  those 
who  are  willing.  The  speculative  exchanges  are  delicate 
mechanisms  whose  use  is  but  just  beginning  to  be  under- 
stood. They  are  great  conserving  forces  and  instrumentali- 
ties for  good.  All  that  is  needed  is  to  understand  them,  to 
acquire  the  skill  of  using  them;  and  hence  to  avoid  the  mis- 
fortunes of  those  who,  instead  of  properly  using,  actually 
attempt  to  play  with  edged  tools. 

The  World  Market 

The  question  of  prices  is  involved  in  much  complexity, 
and  it  is  difficult  to  express  one's  self  in  such  a  way  as  not  to 


160        VALUE  OF  ORGANIZED  SPECULATION 

be  misunderstood.  For  instance,  it  is  perhaps  necessary  to 
explain  that,  when  a  price  tendency  which  affects  the  value 
of  a  commodity  in  a  particular  place  is  mentioned,  it  is  not 
intended  to  imply  that  the  commodity  might  not  have  a 
value  in  the  world's  market  of  which  its  local  value  is 
merely  a  variation.  Thus  it  is  that  the  local  value  of  a 
commodity  is  said  to  be  the  same  as  the  world  value  with 
proper  allowance  for  cost  of  carriage. 

A  commodity  which  is  produced  and  consumed  through- 
out the  world  and  is  the  subject  of  international  trade  has, 
roughly  speaking,  two  values :  —  its  world  value  and  its 
local  value.  And,  roughly  speaking,  its  price  in  the  two 
markets  is  determined  by  quite  different  classes  of  persons : 
—  the  local  traders  and  the  world  traders.  As  a  result  of 
that  peculiar  jealousy  in  human  nature  which  accounts  for 
the  fact  that  a  man  is  always  saying  that  his  own  trade  and 
that  of  his  class  or  of  his  immediate  business  associates  is 
most  important,  and  that  those  who  exercise  other  trades 
are  exploiters,  or  at  least  non-producers,  we  find  the  feeling 
of  opposition  among  farmers,  for  instance,  against  city 
dealers.  The  agriculturalist,  instead  of  welcoming  the 
action  of  the  man  who  receives  his  crop  and  distributes  it 
for  consumption,  appears  to  consider  it  a  kind  of  desecra- 
tion for  any  one  to  trade  in  his  product  after  it  passes  out 
of  the  hands  of  the  local  dealer.  Yet  both  kinds  of  price- 
makers  are  necessary  —  the  makers  of  world  prices  to  con- 
sider the  general  demand  and  supply,  and  the  local  dealer 
and  producer  to  agree  on  such  deductions  and  allowances  as 
are  proper  to  account  for  the  cost  of  transportation  or  other 
factors  which  make  local  prices  diverge  from  world  prices. 

The  local  dealer  is  no  more  fitted  to  determine  the 
world's  market  than  the  student  of  broad  conditions  of 
supply  and  demand  is  fitted  to  understand  the  state  of 
trade  in  a  particular  locality.  Under  present  conditions  the 
specialization  is  accomplished  by  concentrating  those  who 
consider  broad  price  tendencies  in  the  exchanges,  a  par- 


INDIRECT  EFFECTS  161 

ticular  city  representing  a  wide  area  and  there  being  com- 
paratively few  exchanges  throughout  the  world. 

The  tendency  of  those  whose  business  consists  princi- 
pally of  local  affairs  is  toward  provincialism.  This  narrow- 
ness is  often  criticized,  and  with  good  reason.  Yet  it  is 
necessary  that  there  be  those  who  bring  prices  into  touch 
with  local  conditions,  even  if  the  immediate  elements  of 
value  be  exaggerated;  and  the  specialist  on  local  prices  may 
be  pardoned  if  he  sometimes  attaches  too  much  importance 
to  the  particular  facts  within  his  knowledge. 

The  leaders  of  the  exchange  market,  however,  are  im- 
bued with  exactly  the  opposite  tendency.  Their  function  is 
that  of  determining  world  prices;  and,  in  the  broadness  of 
their  vision,  they  pay  perhaps  too  much  attention  to  those 
factors  which  are  remote.  The  whole  machinery  and  appar- 
atus of  a  speculative  exchange  is  constructed  in  such  a  way 
as  to  fix  attention  on  the  world  market.  News  is  gathered 
from  everywhere  for  the  especial  assistance  of  exchange 
traders,  and  far-fetched  conclusions  derived  from  foreign 
dispatches  are  perhaps  given  greater  weight  than  should  be 
assigned  them.  The  quotations  of  other  markets  are  con- 
tinually being  posted,  and  the  tendency  to  bring  together 
the  prices  fixed  on  the  different  exchanges  by  the  agency  of 
arbitragers  is  highly  important.  The  result  is  the  modern 
world  market,  in  which  the  prices  fixed  by  the  free  inter- 
change of  communication  give  the  fullest  effect  to  all  the 
diverse  elements  of  value. 

Admitting,  then,  that  the  makers  of  local  prices  and  of 
world  prices  are  neither  of  them  perfect,  and  that  each 
class  attaches  too  much  importance  to  its  particular  share 
in  the  price-making  process,  yet,  in  the  broad  field  of  com- 
merce, each  is  specializing  in  the  manner  most  to  be 
desired.  The  two  kinds  of  dealers  require  each  a  different 
training;  and  it  is  one  of  the  important  factors  in  the  value 
of  organized  speculation  that  it  furnishes  the  machinery 
whereby  this  specialization  is  effected,  the  speculative 


162        VALUE  OF  ORGANIZED  SPECULATION 

exchanges  representing  a  world  market  to  which  all  local 
prices  can  readily  be  conformed. 

The  Directive  Function  1 

It  is  possible  to  imagine  a  community  (although  of  course 
it  would  be  a  savage  one)  in  which  commodities  would  have 
no  exchange  value,  but  it  would  be  almost  impossible  even 
to  conceive  of  a  state  in  which  there  is  any  civilization 
unless  there  be  some  kind  of  an  arrangement  for  making 
prices.  Even  socialist  writers,  in  describing  their  ideal,  talk 
glibly  of  labor  checks  as  a  measure  of  value.  In  OUT  com- 
petitive system,  furthermore,  the  question  of  price  is  espe- 
cially important.  Prices  effect  the  transfer  of  labor  and 
capital  from  one  enterprise  to  another.  For  example,  if  the 
price  of  wheat  fall,  agriculturalists  are  not  likely  to  sow  as 
much  of  that  cereal  as  formerly;  and  some  of  them  might, 
in  such  case,  abandon  agriculture  altogether,  seeking  other 
and  more  lucrative  fields  of  activity.  Prices,  too,  deter- 
mine the  flow  of  commodities  from  one  city  or  country  to 
another;  and,  like  a  ship  obeying  its  rudder,  so  the  mass  of 
business  transactions  follow  the  lead  of  the  makers  of  prices 
in  the  world's  markets. 

In  fixing  the  price  of  commodities,  it  is  important  to 
determine,  not  only  the  present  price,  but  to  make  some 
estimate,  if  possible,  in  regard  to  future  prices.  The  nation 
must  be  forehanded;  and  not  consume  an  entire  crop  till  a 
subsequent  crop  has  been  assured.  The  advantage,  then, 
as  a  means  of  directing  business  enterprises,  of  an  estimate 
made  by  experts  of  future  prices  is  readily  seen.  In  regard 
to  the  prices  of  speculative  commodities,  there  is  such  an 
estimate,  backed  in  the  best  manner  possible  by  actual 
transactions  of  the  large  business  interests.  The  prices  of 
speculative  commodities  and  securities  as  fixed  upon  the 

1  Cf.  Emery,  Speculation  on  Stock  and  Produce  Exchanges  in  the  United 
States,  p.  143  et  seq.;  Conant,  Principles  of  Money  and  Banking,  book  vi, 
chaps,  ii  and  in. 


INDIRECT  EFFECTS  183 

exchanges  are  published  in  the  newspapers  and  considered 
by  all  persons  in  the  trade.  It  is  necessary,  as  above  ex- 
plained, to  make  certain  deductions  and  additions  in  order 
to  estimate  what  the  present  price  of  a  commodity  may  be 
at  a  certain  place.  The  future  price  of  commodities  at  the 
great  centres  of  commerce  is  the  important  thing  to  con- 
sider; and,  that  being  established,  the  price  which  should 
obtain  at  a  particular  time  and  place  is  readily  calculated. 
Thus  it  is  that  the  specialization  of  functions  becomes 
more  and  more  complete;  and  the  manufacturer,  the  pro- 
ducer, and  the  small  dealer  are  not  obliged  to  consider 
the  broad  movements  of  commerce  which  determine  the 
world's  price  for  a  particular  commodity.  It  remains  only 
for  them  to  haggle  about  the  grades  and  other  conditions 
of  the  transaction  upon  the  basis  of  prices  fixed  upon  the 
speculative  exchanges. 

The  Directive  Influence  of  the  Securities  Market 

In  the  market  for  stocks  and  securities,  this  directive 
influence  is  even  more  pronounced  than  on  the  commodity 
exchanges,  but  the  manner  in  which  it  is  manifested  is  dif- 
ferent. In  stocks  the  important  consideration  is  the  income 
that  is  yielded,  and  particularly  the  prospects  for  the  con- 
tinuance of  that  income,  or  the  possible  increase  of  it. 

There  are  experts  who  are  always  examining  the  earning 
power  of  properties  as  shown  by  their  reports  and  their 
physical  condition,  and  basing  their  purchases  and  sales  on 
the  results  of  such  examination.  A  stock  which  has  good 
prospects  of  paying  a  six  per  cent  dividend  does  not  often 
decline  below  par.  And  when  a  stock,  hitherto  considered 
good,  sells  off  rapidly  in  the  absence  of  generally  unfavor- 
able financial  conditions,  we  may  well  look  for  some  cause 
of  deterioration,  not  readily  apparent,  which  will  account 
for  the  decline. 

Hence,  notwithstanding  the  frequent  fluctuations  and 
other  ill-effects  of  speculation  previously  noted,  the  prices 


164        VALUE  OF  ORGANIZED  SPECULATION 

fixed  upon  the  exchanges  in  their  broad  outlines  are  an 
excellent  expression  of  the  values  of  securities  considered 
on  the  basis  of  their  earning  power  and  prospects.  If  we 
are  impressed  with  the  fact  that  the  fluctuations  of  the 
stocks  are  eccentric,  we  should  remember  that  speculative 
favorites  are  naturally  the  shares  in  companies  concerning 
the  value  of  which  there  is  some  doubt.  As  soon  as  the  more 
important  uncertainties  in  the  value  of  a  property  are  got 
rid  of,  the  stock  rises  in  price,  is  taken  off  the  market  for 
active  speculation,  and  becomes  a  solid  investment. 

This  process  is  not  perfect;  and  while  a  stock  is  thus 
undergoing  digestion  and  assimilation,  there  may  be  mani- 
pulations, contests  for  control,  and  even  insolvency  or  the 
appointment  of  a  receiver.  These  unfortunate  incidents 
are  likely  to  occur  during  the  early  stages  of  a  stock's 
career.  But  after  its  status  has  become  established,  and 
the  adventurers  whose  enterprise  has  been  useful  in  pro- 
moting new  industries  have  left  it  to  conservative  manage- 
ment, the  speculators  upon  the  exchanges  recognize  the 
importance  of  the  progress  that  is  being  made.  For,  long 
before  conservative  investors  are  willing  to  act,  the  specu- 
lators, by  the  prices  that  they  make,  indicate  the  proper 
value  of  the  property;  and  later,  after  that  value  has  been 
generally  recognized,  the  stock  is  absorbed  by  investors. 

The  good  effects  of  organized  speculation  are  best  seen 
after  it  has  had  a  chance  to  accomplish  its  work.  It  is  the 
same  with  any  function  of  any  member  of  civilized  society. 
Thus  the  labor  of  the  builder  does  not  appear  to  best 
advantage  while  the  building  is  in  the  topsy-turvy  condi- 
tion of  being  constructed.  But  wait  till  it  is  completed; 
then  we  may  see  the  best  effect  of  his  work. 

Not  only  does  Wall  Street  make  useful  indications  and 
predictions  in  regard  to  the  proper  price  of  a  particular 
security,  but  in  regard  to  groups,  the  same  excellent  effects 
are  noticed.  For  instance,  if  prospects  for  crops  be  poor 
in  the  farming  section  of  the  country,  this  fact  will  be 


INDIRECT  EFFECTS  165 

reflected  in  the  prices  of  the  stocks  of  the  granger  railroads 
long  before  there  are  any  tangible  effects  upon  business 
conditions  in  the  agricultural  regions. 

General  Business  Predictions 

As  regards  general  business  conditions,  the  manner  in 
which  the  average  prices  for  stocks  foretell  the  same  is 
remarkable  for  its  success.  The  speculative  fraternity  of 
Wall  Street  has  long  sought  for  some  barometer  that  would 
foretell  prices,  but  it  has  not  succeeded  in  finding  any  single 
indication  of  the  fluctuations  of  stocks  which  would  accom- 
plish the  purpose  in  view.  The  reason  is  because  stock  prices 
are  so  early  to  move  in  a  business  advance  or  decline.  It  is 
like  gilding  refined  gold  to  use  a  barometer  to  indicate  in 
advance  the  next  movement  of  a  barometer. 

The  larger  interests  in  finance  and  those  best  capable  of 
judging  the  condition  of  the  country  usually  have  consider- 
able investments  in  stock  companies.  Not  only  do  im- 
portant merchants  and  manufacturers  have  their  holdings 
in  the  form  of  stocks,  in  the  business  which  they  manage, 
but  many  are  wise  enough  to  have  a  reserve  fund  which  they 
can  fall  back  upon,  also  in  the  form  of  securities  that  can  be 
sold  upon  the  speculative  exchanges.  Being  in  a  position 
where  they  can  see  in  advance  of  others  the  first  tendency 
toward  retrogression,  they  are  likely,  in  case  conditions  are 
unfavorable,  to  provide  themselves  with  funds  by  throwing 
some  of  their  securities  upon  the  market;  and,  while  per- 
haps talking  prosperity  to  keep  up  courage,  they  will  thus 
unwillingly  but  actually  initiate  a  decline.  In  the  same  way 
before  a  betterment  of  business  conditions,  these  captains 
of  industry  and  finance  will  see  the  elements  of  business 
improvement  and  increase  their  holdings  of  stocks. 

The  successful  speculators,  too,  from  their  close  acquaint- 
ance with  large  business  men  and  their  study  of  statistics 
of  banks,  railroads,  and  other  underlying  conditions,  will, 
in  their  operations,  make  such  trades  that  they  influence 


166        VALUE  OF  ORGANIZED  SPECULATION 

the  course  of  commerce  and  assist  in  initiating  those  larger 
market  movements  which  begin  before  the  corresponding 
upward  and  downward  swells  of  general  business. 

For  these  reasons  the  speculative  markets  have  a  spe- 
cially directive  influence  upon  commerce  and  furnish  a 
prophecy  in  regard  to  the  future  course  of  general  business. 
If  the  commercial  and  industrial  classes  would  follow  the 
lead  of  the  stock  market  in  making  their  commitments, 
they  would  have  an  almost  unfailing  guide.  Thus,  in  1907, 
we  had  what  is  called  a  rich  man's  panic  occurring  in  the 
early  part  of  that  year.  Stocks  were  thrown  upon  the 
market  by  those  who  were  able  to  gauge  correctly  future 
conditions,  and  hence  the  tremendous  decline.  But  general 
business  was  not  affected  at  that  date.  It  was  not  until  the 
panic  in  November  that  the  country  awoke  to  the  fact  that 
there  were  some  unsound  business  conditions. 

Beginning  at  that  time,  we  had  a  somewhat  depressed 
condition  in  general  business  which  lasted  for  over  a  year. 
Those  small  traders  who  before  were  so  buoyant  had  now 
become  pessimistic,  and  were  anxiously  restricting  their 
business  commitments  and  selling  at  reduced  prices  the 
commodities  and  securities  that  they  had  previously  bought 
at  high  prices.  Only  those  who  looked  to  Wall  Street,  or 
to  the  same  facts  that  determined  Wall  Street's  course, 
were  advantageously  guided  in  their  business  interests. 

For  the  stock  exchange  at  this  time  had  got  over  its 
pessimism  and  saw  light  ahead.  A  boom  in  stocks  was  in 
progress,  and,  while  the  remainder  of  the  country  was  liquid- 
ating, the  Wall  Street  markets  were  advancing.  Later  the 
directive  influence  of  the  great  business  men  as  reflected  in 
Wall  Street  was  felt  upon  the  country,  and  there  was  good 
business  in  1909.  But  early  in  1910  we  find  the  culmina- 
tion of  the  upward  movement  in  stocks  followed  by  a  de- 
cline in  business  which  was  led  by  Wall  Street  liquidation 
and  sagging  markets. 

There  are  other  guides  that  furnish  an  indication  of  the 


INDIRECT  EFFECTS  167 

course  of  general  business,  but  none  of  them  are  compar- 
able to  the  indication  afforded  by  the  course  of  the  security 
markets.  We  can  study,  for  instance,  the  proportion  be- 
tween the  loans  and  deposits  at  the  banks,  the  lending  rates 
of  money,  the  bank  clearings,  the  imports  and  exports,  or 
the  fluctuations  in  the  prices  of  commodities;  and  we  shall 
find  that  these  and  other  statistics  often  throw  light  on 
future  business  conditions.  But  such  statistics  can  only  be 
used  with  the  greatest  discrimination,  and  the  most  glar- 
ing errors  are  made  in  interpreting  them  even  by  experts. 
Whenever  a  business  man  attempts  to  predict  the  course  of 
trade  by  means  of  these  statistics,  and  especially  when  he 
merely  selects  a  few  of  them  for  examination  and  study,  he 
renders  himself  liable  to  make  the  greatest  mistakes.  It 
would  be  much  better  for  him  to  let  the  leaders  of  finance 
direct  commerce,  and  confine  his  operations  to  making  his 
own  business  follow  then*  lead,  as  shown  by  the  broad  move- 
ments of  stocks  and  bonds  upon  the  organized  markets. 

Some  Exceptions  considered 

It  is  just  as  much  in  accord  with  the  natural  order  of 
things  that  Wall  Street  should  direct  the  commerce  of  the 
country  as  it  is  that  the  farmer  should  grow  crops.  But  the 
farmer  does  not  always  grow  crops  well;  he  sometimes 
makes  a  very  bad  mess  of  it.  So  also  does  Wall  Street  in 
its  particular  line.  For  instance,  the  Street  may  lull  the 
financial  world  into  a  feeling  of  false  security,  or  at  other 
times  it  may  give  alarm  of  dangers  which  are  not  really 
impending;  or  a  panic  may  appear  by  reason  of  quarrels 
between  controlling  interests  as  opposed  to  natural  tenden- 
cies of  general  business. 

The  panic  of  1901  is  a  case  in  point,  for  it  had  little  if  any 
effect  upon  the  general  business  of  the  country.  All  of  the 
active  stocks  upon  the  list,  with  the  exception  of  Northern 
Pacific,  fell  rapidly,  and  as  quickly  recovered.  So  rapid 
was  the  recovery  that  no  one  need  have  been  deceived.  Its 


168        VALUE  OF  ORGANIZED  SPECULATION 

temporary  character  was  also  made  apparent  from  the 
facts  of  its  origin  and  accompanying  circumstances,  as 
narrated  in  the  financial  reviews  at  the  time. 

One  of  the  most  interesting  features  of  this  directive  in- 
fluence is  that  Wall  Street  exercises  this  function  in  spite  of 
itself.  It  may  be  quite  contrary  to  the  wishes  of  the  con- 
trolling interests  that  there  should  be  a  general  business  or 
speculative  decline.  Yet,  if  retrogression  must  come,  each 
interest  seeks  to  let  go  of  its  stocks  before  others;  hence 
the  decline  is  all  the  more  suggestive,  and  the  better  indi- 
cation of  what  those  in  a  position  to  know  are  actually 
doing. 

Talk  is  cheap,  and  those  who  express  opinions  are  often 
misled  into  making  false  estimates  of  values,  but  when  the 
talk  is  backed  by  actual  investment,  it  furnishes  a  good  in- 
dication. By  means  of  the  speculative  markets,  the  invest- 
ments of  the  controlling  interests  of  industry  are  bruited 
to  the  world  and  serve  excellently  well  to  furnish  an  indi- 
cation which  it  can  adopt.  The  business  community  upon 
the  outside  does  not  realize  the  excellence  of  the  stock 
market  as  a  barometer  of  general  business  conditions,  but, 
perhaps  because  these  predictions  are  true,  and  evil  as  often 
as  good,  they  are  regarded  with  suspicion. 

Thus  the  prophecies  of  prosperity  made  by  the  stock  ex- 
change are  willingly  believed  and  are  greatly  exaggerated, 
as  they  are  assisted  by  the  naturally  bullish  tendencies  of 
the  people  and  the  self-interest  of  brokers  and  manipula- 
tors. But  the  prophecies  for  evil,  in  accordance  with  well- 
known  traits  of  human  nature,  are  not  received  with  favor; 
and  the  people  are  even  inclined,  when  the  evil  prophesied 
does  take  place,  to  visit  their  resulting  wrath  on  the 
prophet.  Like  a  Cassandra  with  the  gift  of  prophecy,  the 
stock  exchange  finds  that  its  doleful  predictions  are  not 
believed;  and  the  people  suffer  because  they  will  not  fol- 
low the  institution  best  fitted  to  direct  their  commercial 
activities. 


INDIRECT  EFFECTS  1G9 

A  Reduction  in  Costs 

Risks  are  inherent  in  nature,  and  must  be  reckoned  with 
hi  computing  costs  hi  productive  and  commercial  enterprises. 
In  order  to  carry  our  risks  as  cheaply  as  possible,  it  is  of 
advantage  that  the  risk-takers  should  specialize  and  com- 
pete with  one  another.  Further,  they  should  be  so  organ- 
ized and  have  such  intimate  relations  to  other  business  men 
that  their  activities  form  a  part  of,  and  work  in  harmony 
with,  the  general  productive  process. 

Applying  these  principles  to  the  organized  markets,  we 
find,  in  the  first  place,  that  the  enormous  number  of  purely 
speculative  deals  adds  to  the  amount  of  business  done  in 
the  exchanges.  Hence,  in  accordance  with  a  well-known 
economic  law,  the  brokers,  being  assured  of  a  good  income 
from  commissions  on  purely  speculative  business,  find  them- 
selves in  a  position  such  that  they  can  handle  the  trade  in 
actual  commodities  at  a  small  cost  and  furnish  excellent 
facilities  and  conveniences.  This  is  true,  when  we  consider 
commodities  such  as  wheat,  pork,  and  the  like;  and  the  same 
principle  also  applies  in  regard  to  securities.  The  commis- 
sions charged  upon  the  speculative  exchange  seem  infini- 
tesimal when  compared  with  brokers'  commissions  hi  real 
estate  or  outside  commodities. 

The  effect  of  any  insurance  is  to  save  cost.  The  small 
dealer  in  many  different  lines  of  trade  has  a  stronger  posi- 
tion and  can  compete  with  the  large  dealer  to  better  advant- 
age than  is  commonly  supposed;  but  he  is  handicapped  in 
that  he  cannot  afford  to  run  risks  which  may  at  any  time 
sweep  away  all  of  his  small  capital.  The  services  and  capi- 
tal of  these  small  dealers  are  utilized  by  any  system  of  in- 
surance which  will  enable  them  to  run  the  necessary  risks ; 
and  thus  the  general  public  has  the  benefit  of  that  much 
additional  labor  and  capital  competing  in  the  productive 
process. 

By  the  system  of  organized  speculation  certain  risks  are 


170        VALUE  OF  ORGANIZED  SPECULATION 

assumed  by  the  speculators,  as  they  make  a  market  in 
which  any  one  may  trade,  either  in  commodities  or  securi- 
ties. Hedging  is  one  of  the  ways  in  which  the  benefits  of 
this  market  are  communicated  to  outside  commerce.  But 
something  beside  the  direct  effect  of  hedging  is  experienced 
as  a  result  of  organized  speculation.  The  producer  is  in- 
sured against  fluctuations  in  the  price  of  particular  commo- 
dities which  are  notoriously  unstable  in  value;  and  hence 
is  enabled  to  work  at  close  range  and  devote  himself  to  the 
practical  details  of  the  business,  leaving  to  others  the  im- 
portant risks  of  price  fluctuations.  By  this  division  of  labor 
and  of  functions,  he  is  enabled  to  handle  commodities  at  a 
very  small  cost,  and  so  to  reduce  prices  to  the  consumer. l 

The  fact  that  there  are  those  in  the  trade  who  wish  to  be 
given  the  opportunity  to  run  these  risks  proves  that  there 
is  profit  in  it,  the  compensation  for  running  them  entering 
into  the  price  paid  by  the  consumer  of  the  finished  product. 
The  large  interests,  having  a  partial  monopoly,  could,  in 
many  cases,  handle  the  risks  cheaper  than  any  one  outside 
the  speculative  exchanges;  and,  if  they  could  get  rid  of  the 
competition  of  the  exchange  risk-takers,  they  could  add 
this  risk-taking  function  as  a  department  to  their  business. 
The  reason,  therefore,  that  they  seek  to  do  this  is  the  same 
reason  that  moves  a  large  company  with  abundant  capital, 
or  hi  affiliation  with  promoters  who  know  where  they  can 
get  large  capital,  to  enter  any  field  that  promises  profit  of 
itself,  and  which  at  the  same  time  helps  to  give  complete 
control  of  the  market  for  its  particular  specialty. 

The  competition  of  the  risk-takers  upon  the  exchanges 
is  most  effective;  for  the  service  that  is  offered  can  be  con- 
ceived of,  not  merely  as  a  by-product  in  the  ordinary  sense, 
but  something  that  is  produced  in  such  quantities  that 

1  It  is  true  that  many  traders  take  advantage  of  the  fact  that  specula- 
tive markets  exist,  and  use  them  to  make  their  gambling  deals  in.  That 
aspect  of  the  case,  however,  belongs  to  the  other  side  of  the  ledger  and  is 
treated  of  in  the  chapter  on  "Moral  and  Social  Value." 


INDIRECT  EFFECTS  171 

there  is  anxiety  to  get  rid  of  it.  For  the  unskilled  specula- 
tors are  seeking  to  run  risks,  not  from  true  businesslike 
consideration  of  possible  costs  and  income,  but  from  false 
hopes,  and  because  the  mere  excitement  of  running  risks 
gives  them  pleasure  that  otherwise  would  come  from  gam- 
bling games  in  which  the  hazards  are  purposely  created. 
Elsewhere  the  question  will  be  discussed  as  to  whether,  from 
a  moral  point  of  view,  advantage  should  be  taken  of  the 
gambling  propensities  of  the  traders.  For  the  present  it  is 
sufficient  to  say  that  the  willingness  of  the  gambling  traders 
to  take  these  risks  exists  as  a  psychological  fact,  and  forms 
a  part  of  the  machinery  of  the  speculative  exchange.  The 
result  is  that  ventures  are  taken  with  slight  cost,  and,  in 
many  cases,  with  no  cost,  to  the  consumer. 

Another  circumstance  that  reduces  the  cost  of  taking  risk 
upon  the  exchanges  is  that  one  party,  in  hedging  against 
possible  risk,  may  be  the  unconscious  instrument  whereby 
another  party  upon  the  opposite  side  of  the  market  is  also 
hedging.  As  an  illustration,  let  us  suppose  a  miller  who 
has  made  a  contract  to  deliver  a  given  quantity  of  flour  at 
a  certain  time.  In  order  that  he  may  fulfill  his  contract 
without  bearing  the  risk  of  fluctuations  in  the  price  of  his 
raw  material,  he  buys  wheat  futures  as  a  hedge  until  the 
time  when  he  is  ready  to  purchase  the  actual  wheat  of  the 
grade  that  he  wishes  for  milling.  At  the  same  time  an  ex- 
porter has  bought  wheat  for  shipment  abroad.  To  insure 
himself  against  a  decline  in  the  world  value  while  the  wheat 
is  in  transit,  he  desires  to  sell  futures  as  a  hedge.  Thus  it  is 
seen  that  the  exporter  has  but  to  sell  a  short  contract,  and 
the  miller  to  buy  the  same,  in  order  that  both  parties  may 
be  hedged.  Even  under  present  conditions  with  the  enor- 
mous number  of  purely  speculative  deals  in  the  market,  it 
is  doubtless  true  that  trades,  such  as  that  just  suggested, 
frequently  take  place.  One  business  man  by  buying  fu- 
tures as  a  hedge  will  be  giving  the  very  opportunity  needed 
for  another  business  man  to  hedge  by  selling  futures,  both 


172        VALUE  OF  ORGANIZED  SPECULATION 

sides  of  the  deal  being  accomplished  without  the  direct  in- 
tervention of  the  speculator.  But  it  is  the  market  furnished 
by  organized  speculation,  and  made  continuous  through 
repeated  buying  and  selling  by  speculators,  which  gives 
the  facilities  whereby  dealings  of  the  different  classes 
of  business  men  are  utilized  in  many  cases  to  hedge  one 
another. 

It  would  be  impossible  to  prove  by  statistics  that  the  ac- 
tion of  the  speculative  markets,  as  above  explained,  is  to 
save  costs,  for  the  reason  that,  those  who  conduct  a  par- 
ticular business  do  not  confide  to  the  public,  or  to  officials, 
or  even  to  business  associates,  the  exact  profits  that  they 
make,  or  their  various  costs.  Different  methods  of  book- 
keeping show  divergent  results  in  regard  to  these  matters, 
and  even  the  head  of  a  business  may  not  fully  understand 
the  balance-sheet  or  the  manner  in  which  the  accounting 
is  done.  Nevertheless,  some  well-known  instances  will  be 
called  to  mind  in  which  the  opinion  of  those  in  a  position 
to  know  has  been  expressed  either  by  their  acts  or  their 
utterances. 

The  recent  discussion  of  the  increased  cost  of  living 
throws  many  side  lights  upon  the  question  in  hand.  If 
the  whole  subject  were  not  such  a  serious  one,  the  numer- 
ous changes  of  fortune  which  have  befallen  the  different 
parties  to  the  controversy  might  cause  some  amusement. 
About  fifteen  or  twenty  years  ago,  the  farmer  was  the  one 
who  complained  the  loudest,  and,  whatever  the  cause,  the 
prices  of  his  products  at  that  time  were  most  inadequate. 
At  present  the  situation  is  exactly  reversed;  and  the  agri- 
culturalist for  several  years  has  gathered  excellent  crops 
and  received  a  good  price  for  them,  while  the  city  worker  is 
wont  to  complain  of  the  high  cost  of  living.  Fifteen  years 
ago  the  party  which  felt  most  aggrieved  was  saying  that 
the  price  of  agricultural  products  had  gone  down  without 
commensurate  decline  in  salaries  and  debts;  while  at  pre- 
sent the  party  which  has  the  public  ear  is  protesting  that 


INDIRECT  EFFECTS  173 

Wages  have  not  risen  in  proportion  to  the  price  of  food.  To 
this  latter  the  farmer  rejoins  that,  so  far  as  the  advance  is 
concerned,  he  does  not  get  the  benefit  of  it,  since  the  price 
paid  the  farmer  for  his  cattle,  for  instance,  is  not  high 
enough  in  proportion  to  the  price  at  which  dressed  beef  is 
selling. 

It  will  thus  be  seen  that  there  are  three  parties  to  the 
controversy  —  the  producer  of  the  raw  agricultural  pro- 
ducts, the  consumer,  and  the  manufacturer;  while  those 
who  wish  to  be  popular  hardly  know  what  position  to 
take  in  the  matter.  Referring  again  to  the  question  of  the 
profits  of  those  who  manufacture  meat  products,  the  im- 
pression became  so  widespread  some  years  ago  that  their 
profits  and  the  consequent  cost  to  the  consumers  were  high 
that  an  investigation  was  directed  by  Congress.  From  the 
report,  which  was  made  by  Commissioner  of  Corporations 
Garfield,  it  would  appear  that  the  profits  of  the  packers 
were  not  excessively  high.  However,  it  may  be  said,  in 
passing,  that  many  still  cling  to  the  idea  that  there  is  some- 
thing abnormal  in  the  margin  between  the  price  paid  for 
the  raw  material  in  the  meat  industry  and  the  price  of  the 
completed  product.  It  would  carry  this  essay  too  far  afield 
if  an  attempt  were  made  here  to  discuss  the  profits  of  the 
packers  or  others,  and  hence  the  report  of  Mr.  Garfield  will 
be  assumed  to  be  correct.  But  there  is  no  one  who  con- 
tends that  these  profits  are  especially  low  or  that  they 
have  suffered  any  material  decline  since  the  introduction 
of  organized  speculation.  The  significant  fact,  therefore,  is, 
that  in  this  business,  which  pays  at  least  as  high  as  the 
average  profits,  the  raw  material  —  the  hogs,  cattle,  sheep, 
and  other  live  stock  that  the  parties  buy  —  are  not  dealt  in 
according  to  the  future  system  upon  the  speculative  ex- 
changes. On  the  other  hand,  many  of  the  finished  pro- 
ducts, such  as  pork,  lard,  and  short  ribs,  are  so  dealt  in. 
But  if  the  contention  of  the  writer  be  correct,  that  the  mar- 
kets of  the  speculative  exchanges  tend  to  raise  prices  part 


174        VALUE  OF  ORGANIZED  SPECULATION 

of  the  time,  then  is  seen  the  importance  of  the  fact  that 
the  packers  buy  outside  the  speculative  exchanges  and  sell 
in  an  exchange  market. 

In  contrast  to  the  business  of  the  packers,  let  us  consider 
the  wheat  milling  industry.  In  this  business,  the  raw 
material  is  the  subject  of  active  speculation  upon  the  ex- 
changes, while  the  completed  product  is  not.  It  would  ap- 
pear in  regard  to  this  business  that,  while  it  has  expanded 
with  the  growth  of  the  country  and  the  prosperity  of  the 
millers,  the  system  of  trading  in  futures  upon  the  ex- 
changes has  adversely  affected  it,  and  that  the  profits  of 
the  business  are  not  so  great  as  formerly.  In  a  hearing  be- 
fore a  Congressional  committee,  Mr.  Pillsbury  said :  — 

"The  universal  rule  used  to  be  that  the  miller  generally 
accumulated  wheat,  say  when  the  farmers  were  putting  in 
their  surplus  rapidly.  The  universal  rule,  almost,  used  to 
be  that  you  could  buy  the  wheat  cheaper  at  that  time  than 
at  any  other  time,  and  you  could  make  a  fairer  profit  on 
the  actual  holding  of  the  wheat  than  you  could  at  such  times 
when  these  movements  of  the  farmers  were  less  .  .  . 

"The  miller  before  could  generally  use  his  good  judg- 
ment and  make  money  by  the  rise  of  wheat.  I  would  state 
a  fact,  which  perhaps  would  be  a  surprise  to  most  of  your 
committee,  that  I  have  no  doubt  the  milling  interests  in 
this  country,  taken  as  a  whole,  in  the  last  ten  years  have 
paid  the  farmer  more  money  for  wheat  than  they  have 
gotten  out  of  him.  That  is  the  fact  through  the  Northwest. 
I  think  I  can  count  on  the  fingers  of  my  two  hands  the  one 
hundred  and  fifty  milling  firms,  say  ten  years  ago,  in  our 
part  of  the  world,  and  I  think  that  is  true  all  over  the  coun- 
try, that  there  are  only  a  few  millers  who,  by  using  the 
highest  triumphs  of  milling  and  the  best  executive  ability 
and  producing  the  best  brand  of  flour,  have  been  able  to 
make  anything.  The  immense  competition  and  capacity 
of  the  mills  of  this  country  has  doubled  three  times  the 
amount  of  flour  they  can  make  and  it  is  [sic]  got  right  down 


INDIRECT  EFFECTS  175 

the  last  few  years  to  the  question  of  the  survival  of  the  fit- 
test; but  there  was  a  time  when  they  could  always  run  on  a 
profit,  years  ago,  by  buying  wheat  in  the  fall,  say  on  an 
average  at  $1  a  bushel,  and  we  were  almost  sure  to  make  a 
good  profit  by  carrying  it  until  the  time  when  the  state  of 
the  roads,  etc.,  prevented  the  deliveries  being  so  large.  I 
look  on  short  selling  as  being  the  greatest  impediment  on 
the  profit  of  the  milling  business  in  that  way." 1 

Considering  this  testimony,  the  fact  is  called  to  mind 
that  most  profits  have  been  reduced  in  recent  years,  and  no 
one  wishes  the  milling  business  to  be  placed  on  a  less  pro- 
fitable basis  than  other  forms  of  industry  which  have  no 
special  advantage.  Yet,  when  it  is  remembered  that  the 
speculative  exchanges  have  not  been  imposed  upon  the 
country  at  the  behest  of  any  arbitrary  power,  but  have 
grown  up  by  voluntary  association  as  a  natural  develop- 
ment, it  may  be  questioned  whether  the  particular  indus- 
tries that  they  affect  should  be  freed  from  their  action  any 
more  than  from  that  of  any  other  factor. 

The  effect  of  the  speculative  exchanges,  or  of  any  factor, 
upon  profits  in  any  line,  may  eliminate  some  form  of  sur- 
plus that  might  otherwise  have  developed.  But  it  cannot 
make  the  profits  of  a  business  so  small  that  capital  will  be 
diverted  from  it  to  some  more  lucrative  field  and  the  popu- 
lation of  the  country  be  reduced  to  the  necessity  of  eating 
whole  wheat  in  its  unmilled  condition.  Every  one  knows, 
however,  that  the  milling  business  is  one  of  the  prosperous 
and  expanding  industries  of  the  country.  Hence  in  this  de- 
partment of  the  world  of  commerce,  the  speculative  ex- 
changes appear  as  regulators  of  costs  and  profits;  and  we 
find  them  directing  a  particular  trade  so  nicely  that  the 
profits  of  the  manufacturer  have  been  reduced,  with  a 
corresponding  reduction  of  the  price  of  the  finished  pro- 
duct to  the  consumer;  and  yet  the  business  itself  has  not 

1  Testimony  before  the  Committee  on  Agriculture,  House  of  Representa- 
tives, 1st  Sess.,  52d  Congress,  p.  193. 


176        VALUE  OF  ORGANIZED  SPECULATION 

suffered  any  diminution  of  output,  but  has  gone  on  ex- 
panding, developing,  and  serving  the  public. 

From  the  very  nature  of  things,  as  shown  above,  the 
speculative  exchanges  tend  to  cut  down  costs.  As  a  result 
of  their  activities,  the  purely  speculative  business  gives  a 
good  income  to  the  commission  man,  and  the  handling  of 
the  actual  commodities  appears  in  the  similitude  of  a  by- 
product, and  hence  is  done  very  cheaply.  All  forms  of  in- 
surance save  cost,  and  hedging  upon  the  exchanges  is  very 
similar  to  insurance.  By  thus  rendering  it  safe  for  a  nu- 
merous class  of  dealers  of  moderate  capital  to  enter  the 
field,  much  capital  is  utilized  that  would  not  otherwise  be 
available.  Furthermore,  many  of  the  risks  are  run,  not  be- 
cause the  speculators  have  good  reason  to  expect  commen- 
surate profits,  but  because  of  the  love  of  excitement  and 
the  gambler's  illusive  hope  of  gain.  Hence,  in  the  case  of  a 
large  part  of  the  risks,  the  risk-takers  get  no  compensation 
for  taking  them.  Finally,  the  risks  are  eliminated  by  the 
special  action  of  a  free  competitive  market  which  serves 
strongly  to  counteract  the  tendency  toward  monopoly  in 
large  business  houses,  especially  in  those  cases  in  which 
the  raw  product  is  kept  at  the  highest  possible  price  by 
speculation  upon  the  exchanges,  and  the  completed  pro- 
duct is  sold  in  a  market  in  which  there  is  little  organized 
speculation. 

The  Husbanding  of  Resources 

Among  the  complementary  advantages  of  greater  stabil- 
ity in  prices  afforded  by  speculation  is  that  of  the  husband- 
ing of  resources.  The  necessity  for  an  intelligent  and  rea- 
soning demand  for  a  commodity  need  not  be  enlarged  upon. 
Such  a  demand  should,  of  course,  consider  future  wants  and 
supplies  as  well  as  present  conditions.  In  the  case  of  per- 
ishable articles  the  demand  is  limited  to  a  particular  time ; 
and  calculations  which  determine  their  price  are  hastily 
and  roughly  made.  But  with  a  market  of  the  breadth  and 


INDIRECT  EFFECTS  177 

scope  of  the  wheat  market,  a  coordinating  force  is  highly 
advantageous  to  provide  among  other  things  that  a  supply 
be  kept  over  from  the  fat  years  for  use  during  the  lean 
years. 

Acting  from  his  own  selfish  motives,  and  yet  for  the  good 
of  the  community,  the  speculator  notes  the  probability  of 
crop  failure  in  the  midst  of  present  abundance,  and  his 
purchases  tend  to  put  up  the  price  at  such  a  time.  But  the 
rise  in  price  diminishes  consumption  to  some  extent,  with 
the  result  that  a  part  of  the  supply  is  husbanded  till  a  time 
when  it  is  more  sorely  needed.  The  purposes  just  men- 
tioned can  be  accomplished  to  a  greater  or  less  degree  by 
any  form  of  speculation,  but  through  organization  this 
function  is  perfected  and  better  facilities  are  afforded. 
Here,  as  in  other  instances,  the  effects  of  speculation  are 
not  always  what  are  to  be  wished,  as  the  high  prices  brought 
about  by  it  often  attract  a  larger  reserve  than  is  necessary. 
However,  it  is  better  that  reserves  should  be  larger  than 
necessary  than  that  they  should  be  too  small,  and  any  error 
in  this  respect  is  almost  certain  to  be  on  the  side  of  safety. 

Publicity 

The  peculiar  kind  of  organization  effected  by  our  ex- 
changes is  a  model  in  its  way.  It  is  an  organization  where 
each  of  the  units  combined  is  free  to  act  independently, 
and  which  does  not  hinder,  but  facilitates  competition.  In 
this  respect  it  is  quite  different  from  other  kinds  of  com- 
mercial organizations,  which,  whatever  then-  good  qualities, 
tend  to  stifle  the  individual.  Further,  the  organization  ac- 
complished by  the  exchanges  gives  free  play  to  the  expres- 
sion of  opinion  by  any  trader  and  the  widest  publicity  to 
all  statistics  and  facts  bearing  upon  the  speculative  markets. 
All  transactions  in  the  pit  must  on  the  face  of  them  be 
open  and  aboveboard.  Any  member  may  see  and  hear  the 
transactions  made;  and  the  ticker  service,  provided  by 
organized  speculation,  is  not  intended  to  keep  the  terms  of 


178        VALUE  OF  ORGANIZED  SPECULATION 

a  transaction  secret,  but  to  spread  them  in  every  direction; 
the  quotations,  as  fast  as  made,  are  given  to  telegraphers 
who  send  them  to  the  thousands  who  take  the  service;  and 
newspapers  are  given  every  facility  to  print  the  quotations. 
Except  in  the  case  of  bucket  shops  and  a  few  rivals,  each 
exchange  wishes  to  get  its  quotations  before  the  people 
as  widely  as  possible  on  account  of  self-interest,  if  for  no 
other  reason. 

The  gathering  of  news,  which  is  furthered  by  the  ex- 
changes, is  also  of  great  assistance  in  spreading  intelligence 
of  price-making  factors.  There  are  those  who  advocate  pub- 
licity as  a  remedy  for  any  evils  that  might  appear  in  the  de- 
velopment of  corporations  and  of  the  trusts.  Such  persons, 
if  they  wish  to  see  the  actual  working  of  their  remedy,  do 
not  need  to  go  any  farther  than  the  speculative  exchanges. 
Transactions  openly  made  are  ingrained  in  the  very  nature 
of  the  exchange  idea;  and  organized  speculation  is  pub- 
licity itself. 

Summary  of  the  Chapter 

The  indirect  effects  of  the  facilities  afforded  by  organ- 
ized speculation  upon  the  world  of  commerce  exhibit  its 
value  in  a  better  light  than  the  direct  effect  of  fixing  prices. 
While  the  prices  made  are  subject  to  criticism  in  that  they 
are  often  artificial,  the  business  of  the  exchanges  is  so 
closely  articulated  to  the  outside  commercial  world  that  it 
works  with  the  utmost  smoothness  in  relieving  the  business 
community  of  many  of  the  uncertainties  of  business. 

The  speculative  exchanges  furnish  a  continuous  market 
in  which  all  transactions  can  be  liquidated  during  exchange 
hours.  This  important  service  makes  Wall  Street  the  cen- 
tre of  the  financial  system,  as  it  is  the  only  place  in  which 
financial  error  may  be  atoned  for  and  freely  liquidated.  It 
gives  stability  to  the  loan  market,  and  renders  possible  the 
enormous  business  of  lending  upon  stocks,  securities, 
warehouse  receipts,  and  other  collateral,  its  excellence  as 


INDIRECT  EFFECTS  179 

an  agency  in  facilitating  this  business  being  indorsed  by 
the  banks.  The  stock  exchange  does  not  cause  panics,  but 
saves  us  from  the  worse  effects  of  them,  as  it  bears  the  bur- 
den and  takes  the  responsibility  when  the  worst  results  of 
financial  excesses  are  threatened. 

The  exchange  market,  not  only  for  commodities  but  for 
securities,  furnishes  the  place  where  hedging  in  all  its  var- 
ious forms  may  be  best  undertaken.  It  serves  to  knit  to- 
gether all  business  and  gives  a  wide  field  to  the  principle  of 
insurance.  It  is  especially  valuable  in  giving  the  small  busi- 
ness house  the  necessary  security  in  doing  business,  so  that 
it  may  compete  successfully  with  its  larger  rivals. 

The  exchange  gives  free  play  to  the  modern  principle  of 
specialization.  It  produces  a  world  market  where  broad 
conditions  are  given  due  weight,  and  which  serves  as  the 
basis  of  all  markets,  but  it  leaves  to  local  influences  the  spe- 
cial task  of  adapting  these  world  prices  to  the  conditions  of 
a  particular  place.  The  prices  fixed  upon  the  exchanges, 
from  the  broad  vision  of  those  who  make  them,  serve  well 
to  direct  commerce  in  its  important  divisions,  and,  in  the 
course  of  trade  as  reflected  in  market  quotations,  a  pro- 
phecy is  given  in  regard  to  business  conditions  which  it 
would  be  well  for  all  to  heed.  The  speculative  process  re- 
duces costs  and  husbands  resources,  building  up  a  stock  of 
commodities  for  use  in  case  of  crop  failure  or  other  disaster. 
The  means  adopted  to  accomplish  this  purpose  are  of  the 
most  modern  type.  Publicity  is  a  prominent  feature; 
and  the  central  idea  in  all  the  activities  of  the  exchange 
is  to  give  free  play  to  commercial  forces,  to  unite  without 
restricting,  to  promote  solidarity  without  crushing  the 
individual. 


CHAPTER  V 

MORAL  AND   SOCIAL  VALUE 

THE  affairs  of  this  world  are  so  regulated  that  a  utility  will 
often  be  created  even  out  of  something  which  in  its  nature 
is  vicious.  As  the  saying  is,  "There  is  no  great  loss  with- 
out some  small  gain."  The  opposite  also  is  true,  that  a 
beneficent  agency  may  be  accompanied  by  counteracting 
influences  which  nullify  even  the  best  commercial  tenden- 
cies. 

Speculation  of  itself  is  not  wrong;  it  is  helpful,  not  injur- 
ious, to  the  country.  The  speculator  performs  a  useful 
service  in  relieving  others  of  certain  important  risks;  and  if 
the  speculative  exchanges  furnished  facilities  for  this,  and 
this  only,  there  would  be  little  criticism  of  them.  But  com- 
ing with  the  legitimate  speculator,  we  find  his  counterfeit 
and  imitator,  the  adventurer,  a  gambler  who  enters  the 
speculative  markets  for  the  principal  purpose  of  gratifying 
that  love  of  excitement  which  he  craves.  Thus  the  specu- 
lative exchanges  are  so  perverted  from  their  true  commer- 
cial purpose  that  they  pander  to  one  of  the  most  depraving 
of  human  instincts. 

The  Gambling  Spirit 

It  is  well  known  that  the  spirit  of  adventure  that  leads 
one  to  risk  his  money  merely  for  the  excitement  of  taking 
risks  is  one  of  the  most  persistent  of  anti-social  forces.  This 
spirit  may  be  gratified  in  different  ways;  and  the  many 
who  have  the  unnatural  craving  seem  to  be  ever  watching 
for  an  uncertainty  on  which  to  hang  a  bet.  A  gambling 
game  may  be  played  for  the  purpose  of  making  uncertain- 
ties, but  any  fortuitous  event  may  be  utilized.  For  in- 


MORAL  AND  SOCIAL  VALUE  181 

stance,  we  may  have  betting  upon  the  weather  or  an  elec- 
tion, and,  in  the  speculative  markets,  we  have  a  series  of 
fluctuating  prices  which  afford  all  the  uncertainties  which 
the  gambler  so  passionately  desires.  Nor  is  it  necessary  to 
go  through  the  form  of  making  an  actual  bet.  Where 
there  is  organized  speculation,  the  gambler  has  merely  to 
give  his  order  either  to  buy  or  sell,  put  up  his  money,  and 
straightway  he  finds  himself  enjoying  the  excitement  of  a 
gambling  game. 

For  the  evil  which  comes  from  such  a  transaction  is  not 
due  necessarily  to  its  exact  terms,  but  rather  to  the  spirit 
with  which  the  enterprise  may  be  entered  into.  If  the 
terms  of  an  agreement  were  the  actual  criterion  for  decid- 
ing upon  its  nature,  then  a  contract  of  insurance  would  be 
a  bet;  for,  in  such  case,  the  insured  simply  stakes  a  sum  of 
money  against  a  larger  sum  according  to  the  doctrine  of 
chances  that  he  will  die  within  a  specified  time.  Yet  insur- 
ance is  everywhere  recognized  as  most  valuable  both  from 
the  individual  and  from  the  social  point  of  view,  and,  for 
obvious  reasons,  is  seldom  resorted  to  for  gambling  pur- 
poses. 

On  the  other  hand,  it  is  quite  possible  to  gratify  the 
gambling  spirit,  even  in  transactions  where  there  is  actual 
delivery  of  a  commodity.  In  short,  the  writer  takes  the 
position  that  the  question  of  actual  deliveries  is  not  the 
criterion  which  determines  whether  an  institution  is  socially 
valuable.  The  greatest  injury  can  be  wrought  upon  the 
moral  welfare  of  the  business  community  where  the  gam- 
bling spirit  is  fostered,  even  though  there  be  no  actual 
gambling  in  the  strict  sense  of  the  word. 

If  an  enormous  elevator  were  built  at  the  side  of  the  Chi- 
cago Board  of  Trade,  and  if  each  trader  were  assigned  a  bin 
in  that  elevator,  and  then,  by  the  use  of  the  telephone  and 
powerful  machinery,  the  actual  wheat  were  delivered  to 
each  trader  in  his  bin  as  quickly  after  buying  as  deliveries 
are  made  in  a  retail  store,  the  moral  nature  of  the  transac- 


182        VALUE  OF  ORGANIZED  SPECULATION 

tion  and  the  social  injury  wrought  would  not  be  changed  a 
particle.  The  speculator  and  the  speculator's  family  would 
suffer  as  great  a  wrong,  and  the  commercial  world  would  be 
as  much  injured,  if  the  money  were  lost  in  transactions 
where  a  commodity  is  delivered  as  where  it  is  not  delivered. 

Or,  considering  the  stock  market,  does  any  one  hold  the 
idea,  because  stocks  are  delivered  on  the  next  day  after  a 
trade  is  made  upon  the  New  York  Stock  Exchange,  that 
therefore  trading  upon  that  exchange  is  more  moral  than 
upon  the  European  bourses,  where  the  deliveries  are  longer 
deferred  and  trades  more  frequently  carried  for  the  account? 
Indeed,  most  experts  would  take  the  opposite  view,  and 
would  hold  that,  owing  to  the  greater  daring  and  reckless- 
ness of  American  speculators,  the  New  York  Stock  Ex- 
change is  a  more  potent  factor  for  evil  than  the  slower-going 
bourses  of  the  Old  World. 

Or  again,  let  us  consider  forms  of  business  other  than  the 
speculative  kind  and  the  manner  in  which  they  are  con- 
ducted. Many  business  men  are  most  reckless  about  what 
among  speculators  would  be  called  the  size  of  their  margin. 
In  other  words,  they  have  an  extremely  small  amount  of 
actual  property  in  proportion  to  their  indebtedness.  Hence 
they  meet,  in  most  cases,  with  disaster.  But,  perhaps  sav- 
ing something  from  their  creditors,  they  enter  the  field  of 
business  again,  running  as  large  an  estabishment  as  the 
use  of  their  credit  will  allow,  only,  of  course,  to  meet  dis- 
aster as  before.  Still  the  fallacy  of  their  methods  is  not  re- 
alized. Again  the  business  man  is  ready  to  risk  all  he  can 
lay  his  hands  on.  Money  is  borrowed  from  friends  on  re- 
presentations that  are  often  fraudulent,  and  yet  another 
time  the  infatuated  seeker  after  riches  is  led  to  failure, 
while,  in  some  cases,  his  reckless  adventures  are  only  ended 
by  suicide. 

The  infatuation  for  doing  business,  when  the  business 
man  lacks  the  proper  qualifications,  is  just  as  pitiful,  even 
though  he  trades  in  actual  commodities  with  actual  deliv- 


MORAL  AND  SOCIAL  VALUE  183 

cries,  as  the  adventuring  spirit  of  the  gambling  speculator 
upon  the  board  of  trade,  who  puts  off  deliveries  for  sev- 
eral months  in  some  cases,  and,  in  most  cases,  makes  none 
at  all. 

It  is  not  necessary  to  consider  extra-hazardous  forms  of 
business,  such  as  hunting  for  gold  or  oil  in  paying  quantities. 
Even  agriculture  has  its  full  quota  of  those  who  risk  all  in 
reckless  ventures.  The  prospective  farmer  will  emigrate  to 
some  untried  section  of  the  country,  going  in  debt  for  his 
farm,  tools,  and  live  stock,  with  only  a  small  equity  (mar- 
gin) to  protect  him  from  the  results  of  miscalculation;  thus 
staking  everything  upon  a  bountiful  season,  and  reaping, 
in  most  cases,  the  harvest  of  misery  which  his  gambling 
spirit  entails.  About  fifteen  or  twenty  years  ago  there  were 
many  riskers  of  this  sort.  Certain  sections  of  the  country, 
which  were  thought  adapted  to  agriculture,  were  found 
susceptible  to  drought,  and  at  the  same  time  the  prices  of 
agricultural  products  were  low.  The  adventure  of  trying 
to  cultivate  those  lands  was  not  proving  a  success,  and  the 
same  kind  of  misery  that  comes  to  the  unfortunate  specu- 
lator was  the  lot  of  those  ruined  men  who  slowly  dragged 
themselves  back  to  the  more  settled  and  fertile  parts  of  the 
country. 

It  is  impossible  to  form  a  correct  opinion  about  the  real 
evil  of  organized  speculation  if  we  stick  to  the  criterion  of 
whether  deliveries  are  or  are  not  made.  It  is  not  objective 
phenomena  that  lie  at  the  basis  of  the  social  injury;  and 
those  writers  who  undertake  elaborate  descriptions  of  specu- 
lative methods,  showing  that  a  certain  number  of  deliver- 
ies are  made,  with  a  view  to  demonstrating  the  worth  of 
speculation  viewed  as  a  social  factor,  are  but  wasting  their 
efforts.  Any  kind  of  adventuring  is  likely  to  lead  to  human 
misery  if  the  adventurer  risks  all  he  has  and  is  not  able  to 
make  a  wise  choice  in  the  selection  of  his  undertakings. 
Every  business  man  owes  it  to  himself,  his  friends,  and  his 
family  so  to  order  his  business  policy  that  each  risk  that  he 


184        VALUE  OF  ORGANIZED  SPECULATION 

takes  is  founded  upon  an  intelligent  consideration  of  actual 
conditions;  he  should  never  undertake  any  business  enter- 
prise unless  he  has  enough  resources  to  give  the  undertak- 
ing a  fair  chance  of  success  and  to  leave  him  in  case  of  fail- 
ure with  sufficient  means  to  make  a  new  start.  If  he  risks 
all  recklessly,  he  is  but  taking  the  gambler's  chance,  and  is 
almost  certain  to  reap  the  gambler's  harvest  of  financial 
ruin. 

A  Charge  that  is  True 

There  is,  however,  one  charge  against  the  speculative 
exchanges  that  must  be  admitted.  The  general  effect  of 
their  advertising  and  personal  soliciting  of  business  is  to 
make  the  taking  of  reckless  risks  attractive.  Thus  some  of 
them  knowingly  endeavor  to  make  that  which  is  really 
extremely  difficult  appear  easy.  The  brokers  are  as  a  class 
rather  above  than  below  the  average  business  man  as 
regards  personal  honesty.  The  weak  point  in  their  moral 
armor  is  that  they  are  in  a  business  in  which  almost  every 
one  loses;  and  they  encourage  the  people  to  trade,  well 
knowing  the  probabilities  are  that  such  speculations  will 
prove  unprofitable. 

An  article  appeared  some  years  ago  in  "The  Independ- 
ent," entitled  "The  Confessions  of  a  Stock-Broker";  and 
the  editor  of  that  periodical  makes  a  notation  in  the  way  of 
preface  that  it  was  written  by  a  well-known  stock-broker 
whose  name,  for  obvious  reasons,  should  not  be  known.  In 
the  confession  the  broker  states  the  attitude  of  his  house  as 
follows : 1  — 

"Our  office  partner,  when  asked  by  a  client  for  an 
opinion,  usually  ascertains  what  it  is  the  client  wants  to  do 
and  then  gives  him  such  arguments  in  favor  thereof  as 
seem  to  him  to  be  good  —  unless,  as  occasionally  happens, 
there  are  really  strong  arguments  on  the  other  side  which 
seem  to  him  to  be  sufficiently  important  to  warrant  him 
1  Vol.  LXI,  pp.  1468-1469. 


MORAL  AND  SOCIAL  VALUE  185 

interfering  for  the  customer's  own  good.  This  does  not 
often  occur,  but  it  does  sometimes,  and  our  *  office  partner* 
has  more  than  once  prevented  a  customer  from  doing 
something  foolish  —  at  the  cost  of  a  brokerage. 

"We  admit  that  people  who  speculate  will,  in  nine  cases 
out  of  ten,  lose  money  if  they  keep  at  it.  We  admit  that  we 
cannot  guide  them  with  any  certainty  in  their  market  opera- 
tions. We  admit  that  we  want  as  many  customers  and  as 
many  brokerages  as  we  can  get.  And  yet,  if  a  man  came  to 
us  and  said  that  he  wanted  advice  as  to  whether  he  should 
speculate  or  not,  —  he  knowing  nothing  about  it,  —  I 
think  we  should  candidly  advise  him  not  to  do  so  if  he 
could  not  afford  to  throw  away  the  money  he  proposed  to 
risk  (which  no  man  in  his  heart  expects  to  do),  but  we 
should  also  say  that  if  he  insisted  upon  speculating  we 
should  be  glad  of  his  business.  That  about  represents  our 
attitude.  People  will  speculate  and  will  lose  their  money, 
whether  we  do  their  business  or  not,  and  we  feel  that  we 
might  as  well  do  their  business  as  let  some  other  firm  do  it. 
When  people  speculate  with  us,  we  do  the  best  we  can  to 
help  them  to  be  successful,  but  our  best,  we  must  admit,  is 
very  small." 

The  above  quotation  is  not  inserted  because  it  is  thought 
that  an  anonymous  article  hi  a  popular  magazine  is  an 
authority  upon  a  subject,  but  rather  because  the  article 
well  expresses  the  attitude  of  the  better  class  of  brokers 
and  commission  men.  It  would  be  beyond  the  purpose  of 
this  essay  to  discuss  as  a  question  of  pure  ethics  the 
broker's  position.  The  reader  is  left  to  consider  the  moral 
aspect  of  the  situation  according  to  his  own  ideas  of  right 
and  wrong.  It  will  only  be  called  to  mind  that  some 
brokers  are  not  so  scrupulous  as  the  one  just  quoted;  that 
some  of  them  send  out  circulars  in  which  every  encourage- 
ment is  given  the  intending  speculator;  and  that,  in  conver- 
sations about  their  offices  and  elsewhere,  they  are  continu- 
ally urging  the  most  reckless  ventures. 


186        VALUE  OF  ORGANIZED  SPECULATION 

To  be  perfectly  fair  about  the  matter,  however,  the  ques- 
tion may  well  be  asked  whether  our  moralists  are  prepared 
LO  take  the  position  that  it  is  wrong  to  urge  any  one  to 
engage  in  a  business  in  which  there  is  a  possibility  of  suc- 
cess, even  though  the  chances  are  that  it  would  prove  disas- 
trous. There  are  other  forms  of  business  in  which  commodi- 
ties are  actually  delivered,  where  the  same  moral  question 
arises,  and  it  is  needless  to  say  that  great  difference  of 
opinion  exists.  Some  take  the  position  that  a  sane  person  of 
mature  age  should  be  competent  to  make  his  own  choice  in 
regard  to  his  business  enterprises;  while  others  hold  that 
temptation  should  not  be  thrown  in  the  way,  even  of  those 
supposedly  able  to  make  an  intelligent  decision. 

Considering  the  question  as  a  social  problem,  however, 
we  cannot  fail  to  note  that  this  host  of  brokers,  even  though 
they  may,  when  their  advice  is  frankly  asked,  tell  an  in- 
tending speculator  to  leave  the  market  alone,  are  yet  in 
possession  of  effective  persuasive  powers,  which  are  used 
with  little  restraint  in  getting  business.  The  market  review 
written  by  those  skilled  in  attracting  a  clientele,  the  ele- 
gantly furnished  offices  where  all  is  so  comfortable  and 
where  the  most  plausible  theories  for  making  money  are 
constantly  heard,  and  the  gambling  instinct  so  deftly  pan- 
dered to  —  all  combine  to  cause  the  ruin  of  many  who 
would  otherwise  continue  as  useful  members  of  the  com- 
munity. Organized  speculation  as  it  exists  is  a  terribly 
persuasive  power,  which  unsettles  the  judgment  even  of 
intelligent  persons,  and,  appealing  to  certain  common 
weaknesses  of  human  nature,  leads  thousands  every  year 
to  the  ruin  of  a  gambler's  life. 

Corporate  Dishonesty 

Wall  Street  and  the  corporations  are  so  intimately  con- 
nected that  to  the  minds  of  most  people  they  are  synony- 
mous terms.  Yet  the  two  are  in  reality  distinct.  There  may 
be,  and  have  been,  scandals  concerning  the  management  of 


MORAL  AND  SOCIAL  VALUE  187 

corporations,  and  yet  not  a  word  of  that  scandal  has  been 
reflected  upon  the  stock  exchange  itself.  So,  too,  the  mani- 
pulations of  stocks  by  Wall  Street  speculators  have  no 
necessary  connection  with  the  management  of  corporations. 
The  president  or  other  officers  of  a  railroad  company,  for 
example,  may  all  be  engaged  with  some  problem  of  con- 
struction and  equipment  at  the  very  time  when  there  are 
important  bull  and  bear  movements  upon  the  exchange. 

Nevertheless,  it  must  be  admitted  that  there  is  great 
temptation  for  the  officers  of  a  company  to  speculate  in  its 
stocks,  and  to  use  their  private  information  as  a  means  of 
furthering  then-  own  interests  in  a  speculative  way.  The 
temptation  is  all  the  greater  from  the  fact  that  it  is  the 
business  of  the  higher  officers  of  a  corporation  to  attend  to 
its  finances;  and  the  borrowing  power  is  increased,  and  the 
credit  of  the  corporation  made  better,  if  the  stock  be  so 
esteemed  that  it  sells  at  a  high  figure.  The  management 
may  detest  the  methods  of  the  stock  manipulator,  but  they 
can  hardly  do  aught  to  discourage  him,  when  they  know 
that  he  is  seeking  to  enhance  the  value  of  the  property  for 
which  they  have  become  responsible. 

It  is  difficult  to  draw  the  line  as  to  how  much  interest  the 
corporation  manager  should  take  in  stock  exchange  quota- 
tions. To  some  extent  he  is  forced  into  the  market  by  the 
very  process  of  conducting  the  finances  of  the  company; 
but,  being  in,  he  may  be  gradually  led  into  some  of  the 
practices  of  the  stock  manipulator,  even  to  the  dishonest 
expedient  of  seeking  to  depress  the  value  of  the  stock  of  the 
very  corporation  that  he  has  been  selected  to  protect. 

This  actual  destruction  of  property,  fraud  or  robbery, 
according  as  it  is  viewed,  cannot  be  too  strongly  con- 
demned. It  is  the  worst  form  of  the  combination  of  specu- 
lative activities  with  positions  of  trust.  The  instances 
where  it  occurs  are  much  rarer  than  is  popularly  supposed; 
and  with  the  growth  and  systemization  of  commerce,  and 
with  publicity  and  interest  in  large  corporations,  there  is  not 


188        VALUE  OF  ORGANIZED  SPECULATION 

so  much  of  it  as  formerly.  The  corporation  wrecker,  even 
if  he  succeed  in  making  a  profit  by  his  wrecking  tactics, 
must  find  some  place  to  invest  his  gains;  and  his  invest- 
ment of  them  gives  him  such  a  stake  in  the  prosperity  of  the 
country  that  it  is  not  for  his  interest  to  seek  to  depress 
industrial  conditions. 

But  whatever  relation  there  may  be  between  the  tempta- 
tions afforded  by  the  stock  exchange  markets  and  corporate 
dishonesty,  the  connection  is  by  no  means  a  necessary  one. 
Probably  the  most  numerous  cases  of  fraud  and  misman- 
agement are  such  as  have  been  found  among  corporations 
that  are  not  listed  upon  the  exchange.  Thus  the  managers 
of  a  corporation  may  so  conduct  it  that  the  stock  becomes, 
or  appears  to  become,  valueless,  in  which  case  it  may  be 
purchased  from  the  ruined  holders  for  a  song.  It  requires 
no  stock  exchange  to  accomplish  this  familiar  process  of 
freezing  out. 

Another  form  of  mismanagement  which  has  no  connec- 
tion with  the  exchange  is  that  whereby  a  corporation  man- 
ager, acting  in  his  fiduciary  capacity,  deals  with  himself  as 
an  individual  in  such  a  way  as  to  give  himself  the  best  of  any 
bargain  or  contract  entered  into.  This  highly  discreditable 
form  of  dishonesty  must  be  carefully  distinguished  from 
any  possible  evils  furthered  by  speculative  exchanges.  It 
can  readily  be  practised  by  any  one  occupying  a  position  of 
trust  in  a  corporation  whose  stock  is  not  sold  upon  an  ex- 
change, or  even  in  the  case  of  an  ordinary  business  partner- 
ship. Nevertheless  it  must  be  admitted  that  the  system  of 
short  selling  that  prevails  on  the  exchanges  furnishes  special 
facilities  and  temptations  to  resort  to  dishonest  methods. 
Thus  the  corporation  wrecker  may  sell  the  stock  of  his 
company  short,  and  make  a  profit  on  the  decline,  in  addi- 
tion to  the  other  forms  of  profit  just  mentioned. 

Considering  the  question  again  in  its  larger  aspects,  there 
is  no  one  about  a  stock  exchange,  whether  it  be  broker, 
corporation  manager,  or  speculator,  who  really  benefits 


MORAL  AND  SOCIAL  VALUE  189 

in  the  long  run  from  corporate  mismanagement  or  any 
form  of  disaster.  The  stock  exchange  thrives  upon  pros- 
perity; and  it  is  more  likely  to  be  optimistic  than  to  be  the 
reverse.  It  depends  upon  security,  and  the  profits  of  all  are 
increased  if  the  corporations  whose  stocks  and  bonds  are 
dealt  in  can  be  relied  upon;  and,  especially,  if  then*  manage- 
ment be  sound. 

The  exchange,  then,  should  be,  and  is,  the  great  pro- 
tagonist in  favor  of  honesty  in  corporate  management. 
One  way  in  which  it  helps  to  accomplish  this  result  is  by  its 
system  of  listing  stocks  for  trading.  Before  a  stock  may  be 
traded  in  upon  the  New  York  Stock  Exchange,  it  must  be 
examined  by  a  committee;  and  if  the  stock  does  not  meet 
the  requirements  of  the  committee,  it  is  not  listed.  The 
reason  for  this  can  be  none  other  than  that  the  traders  have 
an  interest  in  seeing  that  the  corporations  whose  securities 
they  deal  in  are  honestly  managed  and  the  securities 
properly  issued.  If  the  members  of  the  stock  exchange 
knew  their  own  interests  as  well  as  they  ought  to  know 
them,  this  requirement  would  be  made  more  exacting. 
However,  the  changes  in  this  regard  are  in  the  nature  of 
progress.  The  worst  abuses  and  by  far  the  most  glaring 
frauds  perpetrated  upon  innocent  investors  have  been  in 
securities  which  are  not  traded  in  upon  the  exchanges. 

False  Rumors 

There  is  a  method,  however,  by  which  the  officers  of  a 
corporation  may  cause  market  fluctuations  without  neces- 
sarily affecting  the  physical  condition  of  the  property  in 
their  charge.  It  consists  in  spreading  false  rumors  in 
regard  to  the  corporation,  and  at  the  same  time  scalping 
the  market  by  the  aid  of  the  fluctuations  so  caused.  For 
example,  the  speculative  director  may  make  a  short  sale  of 
the  stock  of  his  company.  If  the  market  goes  against  him, 
he  may  get  out  at  a  profit  by  starting  a  false  rumor.  He 
may,  perhaps,  remark  to  an  acquaintance  that  the  com- 


190        VALUE  OF  ORGANIZED  SPECULATION 

pany  will  probably  be  obliged  to  issue  bonds  very  soon.. 
The  acquaintance  thus  becomes  possessed  with  the  idea 
that  he  has  a  "tip"  from  an  insider  and  spreads  the  rumor, 
even  though  he  may  have  been  told  not  to  tell  it.  The 
rumor  is  soon  the  common  talk  of  the  street,  and  the  stock 
quickly  falls.  The  speculative  director  then  covers  his 
short  and  goes  long,  for  he  knows  that  a  reporter  for  a 
newspaper  or  news  agency  will  be  likely  to  interview  him 
or  some  of  his  associates  in  regard  to  the  matter.  When  the 
reporter  arrives  at  the  office  of  the  company,  the  rumor  is 
of  course  indignantly  denied,  which  denial  at  once  goes  out 
on  the  tape;  and  our  speculative  director  finds  that  he  has  a 
profit  on  his  long  stock  as  well  as  the  profit  he  has  already 
reaped  upon  his  short  sale.  This  method  of  scalping  the 
market  by  those  in  a  position  to  know  the  condition  of  a 
particular  stock,  and  able  to  affect  its  selling  price  by 
spreading  false  rumors,  is  of  course  wrong  from  a  moral 
point  of  view,  although  it  does  not  accomplish  the  purpose 
by  the  more  clumsy  or  brutal  method  of  wrecking  the 
corporation. 

Frequently  the  hopes  and  fears  of  the  speculator  are 
wrought  upon  by  keeping  up  an  air  of  mystery.  There  are 
vague  hints  of  "melons*'  that  are  about  to  be  cut  and  of 
"plums"  for  the  expectant  stock -holder;  for  it  has  been 
noticed,  by  those  who  study  his  psychological  nature,  that 
he  is  more  affected  by  mysteries  and  sensational  develop- 
ments which  can  be  easily  grasped  by  the  mind  than  by 
detailed  statements  of  facts  and  figures  which  require  study 
to  understand. 

An  important  feature  of  general  policy  may  be  shrouded 
in  mystery  for  months;  and  all  this  time  the  directors  may 
be  milking  the  market  by  spreading  false  rumors  so  that  it 
will  move  backward  and  forward  according  to  their  wishes. 
When  the  day  for  decisive  action  arrives,  the  directors  will 
go  into  session,  the  market  fluctuating  rapidly  all  the  time, 
reporters  waiting  outside  the  directors*  room  to  hear  the 


MORAL  AND  SOCIAL  VALUE  191 

news,  and  messenger  boys  hurrying  back  and  forth  carrying 
the  orders  of  the  directors  now  to  buy,  now  to  sell,  accord- 
ing to  the  tips  which  are  continually  going  out  to  influence 
the  market  fluctuations. 

Sometimes  the  directors  of  a  corporation  surprise  out- 
siders with  some  startling  coup,  as  by  declaring  a  dividend 
when  least  expected,  or  by  changing  the  policy  of  the  com- 
pany by  paying  out,  in  the  form  of  a  dividend,  a  larger 
proportion  of  the  earnings  than  was  anticipated.  A  par- 
ticularly notable  case  of  the  sort  just  mentioned  occurred 
some  few  years  ago  and  is  familiar  to  all  Wall  Street  men. 

Any  corruption  by  legislators  is  likely  to  take  a  different 
form  from  that  of  influencing  quotations  with  a  view  to 
scalping  the  market.  Still  the  question  has  been  raised 
whether  it  is  proper  that  the  ticker  should  occupy  a  place 
in  capitol  buildings;  and  brokers  have  been  fined  for  con- 
tempt and  imprisoned  because  they  refused  to  reveal  the 
names  of  some  of  their  clients. 

There  is  nothing  which  obliges  any  person  occupying  a 
position  of  trust  to  speculate.  But  the  market,  being  al- 
ways ready  on  every  business  day  and  being  systematized 
so  that  it  is  most  sensitive  to  every  rumor,  supplies  facilities 
for  scalping  to  those  who  can  influence  it;  and  it  can  be 
easily  influenced  by  any  one  occupying  high  official  posi- 
tion in  a  corporation. 

The  Crop  Killer 

But  it  is  not  merely  in  the  matter  of  the  management  of 
corporations  that  organized  speculation  gives  facility  for 
lying  and  the  spreading  of  false  rumors.  The  markets  for 
commodities  do  not  give  opportunity  for  that  betrayal  of 
trust  which  is  seen  in  the  case  of  the  speculative  director; 
but,  as  for  doing  business  upon  the  strength  of  lies  deliber- 
ately made,  the  manipulator  of  the  wheat  and  cotton 
markets  is  perhaps  even  worse  than  his  prototype  upon  the 
stock  exchange.  The  most  usual  method  of  manipulating 


192        VALUE  OF  ORGANIZED  SPECULATION 

the  market  for  agricultural  products  is  by  exaggerating  any 
unfavorable  conditions  which  the  farmers  may  have  expe- 
rienced, such  as  drought,  storms,  and  other  catastrophes. 
This  "killing  of  the  crop,"  as  it  is  called,  is  the  favorite 
device  of  the  manipulator,  because  of  the  nervous  appre- 
hension existing  about  possible  crop  failures  and  the  man- 
ner in  which  the  uncertainties  of  crop  conditions  readily 
lend  themselves  to  exaggeration. 

The  manipulator,  especially  when  he  finds  the  commodity 
selling  on  an  export  basis  or  near  it,  loads  up  with  a  large 
quantity.  His  interest  is  to  advance  the  price,  as  he  knows 
that  it  can  be  more  easily  put  up  than  down.  But  when  no 
particular  calamity  falls  upon  the  crop,  one  must  be  imag- 
ined. It  is  here  that  the  crop  killer  makes  his  appearance 
and  does  his  work. 

In  any  year,  even  of  bountiful  crop,  there  will  be  damage 
in  some  sections  of  the  country;  and,  on  the  foundation  of 
local  damage,  the  most  terrible  calamities  are  predicted. 
The  different  experts  set  off  for  the  region  that  is  supposed 
to  be  in  danger.  They  travel  over  it  and  continually  send 
in  reports  of  the  most  doleful  character.  Their  reports 
come  out  in  brokers'  circulars  and  on  the  tape  and  are 
printed  in  the  newspapers.  But  when  the  time  for  harvest 
comes,  it  will  usually  be  found  that  the  damage  has  been 
much  exaggerated  and  excellent  receipts  will  come  in,  even 
from  the  region  in  which  the  crops  were  supposed  to  be 
greatly  injured.  So  utterly  misleading  are  most  of  these 
crop  reports  furnished  by  interested  parties  that  the  ques- 
tion of  crop  reporting  has  become  a  joke;  and  it  is  the  com- 
mon remark  to  be  heard  on  'change  that  no  reliance  can  be 
placed  upon  them.  Yet  it  pays  to  send  out  these  deceptive 
reports,  as  the  inexperienced,  and  to  some  extent  the 
experienced,  speculator  may  be  deceived  by  them. 

The  government  report,  which  comes  out  once  each 
month  during  the  growing  season,  is  much  more  reliable, 
and,  of  course,  is  eagerly  watched  for.  But,  even  in  the  case 


MORAL  AND  SOCIAL  VALUE  193 

of  the  government  report,  scandals  are  not  unknown.  Un- 
fairness is  most  frequently  charged  in  the  matter  of  letting 
certain  parties  know  the  percentages  of  crop  conditions 
before  others.  Different  times  of  the  day  have  been  set  for 
the  giving-out  of  the  report  in  order,  if  possible,  to  diminish 
the  speculative  excitement.  Thus  it  is  that  these  squabbles 
among  the  speculators,  together  with  their  charges  and 
recriminations,  fix  upon  the  onlooker  the  impression  that 
the  standard  of  morality  among  them  is  not  particularly 
high;  and,  when  he  realizes  that  it  produces  such  men  as 
these,  may  arouse  grave  doubts  even  of  the  value  of  organ- 
ized speculation. 

It  then  appears  that  lying  is  taken  as  a  matter  of  course 
upon  the  exchanges;  and  the  general  effect  of  all  this  trick- 
ery and  deception  is  demoralizing  in  the  extreme.  So 
common  is  lying  among  speculators  that  an  air  of  suspi- 
cion pervades  the  dealings.  Every  one  about  an  exchange 
seems  to  be  watching  every  one  else,  either  to  detect  some 
fraud  in  others  or  to  make  some  kind  of  a  grab  himself.  All 
of  which  shows  that,  if  organized  speculation  be  not  gamb- 
ling, it  has  many  of  its  morally  depraving  features;  and  the 
undoubted  services  of  our  organized  markets  are  offset  by 
the  undesirable  features  which  come  in  with  them. 

Some  Discrepancies  and  Contradictions 

The  different  practices  of  organized  speculation  and  the 
imitations  of  it  are  not  the  same  in  their  moral  significance 
and  their  effects  on  general  social  conditions.  The  bucket 
shop  is  not,  properly  speaking,  speculation  of  any  kind. 
But  it  possesses  the  outward  appearances  of  a  broker's 
office;  and  it  is  difficult  at  first  for  a  trader  to  ascertain 
whether  his  deals  are  bucket-shopped  or  whether  pur- 
chases and  sales  are  actually  made  upon  an  exchange.  In 
markets  furnished  by  organized  speculation,  deliveries 
are  made,  and  such  markets  have  great  effect  in  establish- 
ing prices  for  the  articles  traded  in.  The  bucket  shop,  how- 


194        VALUE  OF  ORGANIZED  SPECULATION 

ever,  has  nothing  to  do  with  real  commodities  or  securities, 
except  that  the  names  and  forms  are  used;  and  there  may 
be  large  bucket-shop  operations  without  affecting  to  any 
degree  actual  trade. 

The  crossing  of  trades  occurs  where  a  broker  has  an  order 
to  buy  and  one  to  sell  a  particular  commodity  or  security 
at  the  same  price  and  at  the  same  time,  but  for  different 
clients,  and  executes  the  orders  by  entering  one  against  the 
other.  This  practice  is  illegal,  as  our  law  does  not  allow  any 
one  to  be  the  agent  for  both  the  buyer  and  seller  in  the 
same  transaction;  and  it  throws  temptations  in  the  way 
of  the  broker  which  might  be  abused.  The  rules  of  ex- 
changes are  not  the  same  upon  the  matter,  but  it  is  for- 
bidden in  most  of  its  forms.  When  it  is  realized,  however, 
that  a  large  commission  house  has  numerous  orders  both 
to  buy  and  sell  coming  in  during  exchange  hours  which 
must  be  executed  rapidly,  and  that  it  may  have  several 
partners  or  employees  in  the  pit  executing  orders,  it  is  seen 
that  some  form  of  crossing  trades  is  almost  unavoidable. 
In  this  connection  the  fact  might  be  noted  that  in  Euro- 
pean bourses  and  in  financial  and  banking  houses  that  deal 
in  stocks  on  the  Continent,  some  of  the  common  practices 
bear  a  strong  resemblance  to  what  we  in  America  would 
call  bucket-shopping  and  crossing  of  trades. 

Bucket-shop  deals,  the  crossing  of  trades,  and  legitimate 
exchange  trading  almost  imperceptibly  shade  into  one 
another;  and  it  is  no  wonder  that  opinions  differ  as  to  ex- 
actly where  the  lines  should  be  drawn.  But  those  who  con- 
tend, as  many  do,  that  there  is  no  difference  between  them, 
are  not  reasonable  in  their  argument.  One  might  as  well 
attempt  to  prove  that  there  is  no  difference  between  a 
plant  and  an  animal  because  scientists  have  difficulty  in 
some  cases  in  determining  whether  a  particular  specimen 
belongs  to  the  animal  or  vegetable  kingdom. 

Privileges  constitute  another  interesting  feature  of  specu- 
lative trading,  the  social  value  of  which  can  only  be  justly 


MORAL  AND  SOCIAL  VALUE  195 

estimated  by  using  the  nicest  discrimination.  If  a  prospect- 
ive purchaser  of  real  estate  is  not  certain  whether  he 
wishes  to  buy  a  particular  property,  he  will,  in  some  cases, 
get  the  owner  to  give  him  the  refusal  of  it — that  is,  to 
hold  the  offer  open  for  a  time  till  arrangements  and  investi- 
gations can  be  made  and  conclusions  reached  as  to  whether 
it  is  possible  or  advisable  to  purchase.  Such  an  agreement 
is  frequently  put  in  writing  in  a  form  enforcible  by  law. 
The  prospective  buyer  of  the  land  and  the  actual  buyer  of 
the  option  will,  for  instance,  pay  $10  for  the  privilege  of 
buying  for,  say  $5000  at  any  time  within,  say  sixty  days. 
The  principle  of  such  a  contract,  which  real  estate  men  call 
an  "option,"  is  the  same  as  what  exchange  speculators 
term  a  "call."  And  yet  that  which  real  estate  dealers  con- 
sider a  perfectly  legitimate  business  operation  is  looked  at 
with  horror  when  done  upon  a  speculative  exchange. 

A  "put"  is  the  opposite  of  a  "call";  for,  if  a  trader  owns 
a  put  he  has  the  privilege  of  selling,  or  putting,  a  certain 
commodity  or  security  at  a  specified  price  within  a  certain 
time.  Yet  these  privileges,  when  dealt  in  on  an  exchange, 
are  prohibited  by  law  and  by  special  rules;  and  officers  and 
members,  who  see  no  wrong  in  ordinary  exchange  trading, 
frequently  denounce  them  as  pure  gambling.  But  why  it 
is  that  that  which  is  right  when  done  in  handling  real  es- 
tate, is  wrong  when  done  in  handling  grain,  is  difficult  to 
understand  except  from  a  practical  standpoint. 

For  what  is  the  way  in  which  these  contracts  are  used  in 
practice?  A  trader  will  buy  a  put  on  July  wheat,  say  at 
90.  Then  he  will  watch  the  quotations  during  the  day, 
hoping  for  a  chance  to  "buy  against  it";  for  he  knows 
that,  if  the  market  goes  low  enough,  his  broker  will  accept 
the  put  as  margin  or  security  for  a  deal  in  the  particular 
future.  In  case  the  market  does  not  go  as  low  as  expected, 
the  trader  only  loses  the  amount  paid  for  the  put,  and  has 
enjoyed  the  pleasurable  anticipation  of  high  possible  gains. 
Occasionally  such  hoped-for  profits  are  actually  realized,  as 


196        VALUE  OF  ORGANIZED  SPECULATION 

the  market  will  go  into  the  put  and  move  backwards  and 
forwards  several  times  during  the  day,  enabling  him  by 
scalping  the  market  to  make  a  large  percentage  of  profit  on 
his  small  investment.  The  exercise  of  ingenuity  in  plan- 
ning the  scheme,  and  directing  the  operation  during  the 
day's  market,  afford  just  about  the  amount  of  opportun- 
ity for  thought  and  exertion  which  some  traders  wish; 
while  the  possible  profits,  so  seldom  reaped  in  practice  but 
so  large  in  comparison  with  the  amount  ventured,  afford 
full  play  for  that  deceptive  confidence  —  that  hoping 
against  hope  —  which  is  such  a  prominent  characteristic 
of  the  mental  processes  of  the  speculator  or  gambler. 

It  is  possible  to  imagine  uses  for  privileges  in  a  legiti- 
mate transaction  in  stocks  or  futures.  They  could  be  used, 
for  instance,  as  a  hedge  or  insurance;  but,  while  the  forms 
of  hedging  described  in  the  early  part  of  this  essay  are 
practicable  and  are  used  extensively  by  flour-millers,  cot- 
ton-spinners, and  others,  privileges  give  but  an  imper- 
fect protection  and  are  highly  expensive.  Thus,  suppose 
a  trader  has  bought  a  wheat  future  at  90.  If  he  buy  a  put 
to  protect  the  purchase,  there  will  be  some  spread.  Let  us 
assume  it  to  be  one  cent  and  that  the  put  was  purchased 
at  89.  The  privilege  will  then  do  the  purchaser  no  good  till 
that  figure  is  reached;  and  it  is  the  exception,  rather  than 
the  rule,  when  the  market  goes  in  the  puts.  The  market 
may  close  a  fraction  above  89;  and  it  may  be  necessary  to 
purchase  another  put  for  the  next  day,  which  may  turn  out 
to  be  as  bad  an  investment  as  the  first.  And  it  is  quite  pos- 
sible to  have  an  extreme  decline,  with  the  market  closing 
above  the  puts  each  day,  in  which  case  the  purchaser  loses 
money  on  the  long  wheat  and  has  the  puts  to  pay  for  in 
addition. 

Considered,  however,  as  a  question  of  practical  morals, 
and  from  the  point  of  view  of  the  social  value  of  organ- 
ized speculation,  privileges  must  be  considered  as  doing 
more  good  than  injury  to  the  community.  The  reason  is, 


MORAL  AND  SOCIAL  VALUE  197 

that,  if  the  unskilled  trader  must  speculate,  it  is  better  he 
should  do  it  through  privileges,  since  he  knows  in  advance 
just  how  much  his  possible  loss  will  be,  and  is  not  led  into 
venturing  enormous  amounts  of  money  which  he  needs  for 
other  purposes. 

The  Test 

In  making  the  test  and  forming  some  estimate  of  the  net 
value  of  the  speculative  exchanges  as  factors  in  the  world 
of  commerce,  it  is  not  fair  to  make  the  comparison  on  the 
assumption  that  business  methods  are  of  spotless  purity 
elsewhere.  Every  group  of  business  men,  or  of  any  men, 
have  faults;  and  these  faults  are  frequently  peculiar  to  the 
calling  of  the  particular  group.  As  illustrations,  attention 
might  be  called  to  the  fact  that  adulteration  is  practiced  in 
many  kinds  of  manufacture,  and  that  poison  has  been 
placed  in  articles  intended  for  human  food,  even  in  such  as 
are  never  sold  upon  the  board  of  trade. 

Furthermore,  the  speculative  exchanges  have  certain 
virtues,  and  the  men  of  Wall  Street  and  of  La  Salle  Street 
have,  in  some  respects,  an  even  higher  standard  than  pre- 
vails elsewhere.  In  the  matter  of  doing  as  agreed,  the 
brokers  are  most  scrupulous.  Contracts  involving  enor- 
mous sums  of  money  are  entered  into  in  the  midst  of 
the  wildest  confusion;  and  it  may  be  truly  said,  in  making 
the  comparison,  that  a  word  or  a  nod  upon  the  floor  of  an 
exchange  is  better  than  a  bond  entered  into  elsewhere. 
There  is  not  that  evasion  in  carrying  out  contracts  which 
is  found  in  other  lines  of  business. 

The  members  of  speculative  exchanges  submit  many  of 
their  misunderstandings  that  might  otherwise  develop  into 
suits  at  law,  to  the  arbitration  of  a  committee,  which  does 
away  with  a  considerable  portion  of  the  legal  forms  and 
red  tape  of  judicial  procedure.  And  the  rules  of  the  ex- 
changes, which  the  members  submit  to,  bind  them  to  a 
higher  standard  of  business  scrupulousness  and  cover  more 


198        VALUE  OF  ORGANIZED  SPECULATION 

points  of  commercial  honor  than  are  contained  in  any  legal 
code.  The  grading  of  commodities  is  arranged  for  either  by 
law  or  by  exchange  rules  which  are  generally  fair;  and,  refer- 
ring to  the  sales  made  by  sample,  it  is  remarkable  with 
what  facility  they  are  effected  and  how  few  quarrels  result. 
It  must,  indeed,  be  confessed  that  there  is  a  great  deal 
of  deceit  and  bluster  in  all  kinds  of  business.  The  differ- 
ence in  this  respect  would  seem  to  be  that  the  wrongdoing 
in  organized  markets  is  greater  before  a  contract  is  made; 
but,  after  a  contract  is  entered  into,  the  exchange  members 
are  more  scrupulous  than  business  men  upon  the  outside. 

A  Summary 

Summing  up,  however,  and  looking  at  the  question  in  all 
its  different  aspects,  it  must  be  admitted  that  the  business 
of  the  speculator  is  not  one  which,  in  its  present  develop- 
ment, gives  the  moral  discipline  seen  in  other  forms  of 
trade.  The  particular  fault  of  speculation  is  the  fact  that 
it  nurtures  the  gambling  spirit.  It  gets  men  into  the  habit 
of  seeking  to  take  advantage.  In  ordinary  business  trans- 
actions it  is  generally  supposed  that  all  parties  to  a  contract 
are  benefited.  A  contrary  impression  prevails  upon  the 
speculative  exchanges,  for  it  is  supposed  there  that  what 
one  party  makes,  the  other  party  loses.  This  impression  is 
frequently  a  false  one,  as  has  been  shown  heretofore.  But 
the  transactions  upon  the  exchanges  in  which  both  parties 
profit  are  exceptional,  and  the  minds  of  the  speculators 
are  too  often  fixed  upon  some  sort  of  trick  or  illegitimate 
form  of  gain. 

Speculating  upon  the  exchanges  is  not  necessarily  gam- 
bling, but  it  has,  in  some  cases,  the  evils  of  gambling.  There 
is  the  same  disposition  to  get  something  for  nothing,  the 
same  temptation  to  cheat  in  order  to  make  a  venture  suc- 
cessful. The  average  speculator  upon  the  exchanges  is 
always  losing,  but  he  is  not  willing  to  admit  that  any  part 
of  his  losses  is  due  to  his  own  folly;  so  he  throws  all  the 


MORAL  AND  SOCIAL  VALUE  199 

blame  upon  others,  and  soon  becomes  fully  educated  in  the 
school  which  assumes  that  he  has  a  right  to  cheat  when- 
ever he  can. 

The  injury  which  speculation  does  to  the  individual  is 
recognized  on  every  hand.  Positions  of  trust  are  usually 
barred  to  the  man  who  speculates.  Business  men  know 
that  the  temptations  which  beset  one  upon  the  exchanges 
are  such  that  many  are  unable  to  resist  them.  Everywhere 
the  instances  of  those  who  have  been  led  to  commit  crime 
by  reason  of  speculation  are  brought  to  our  attention.  The 
newspapers  often  conclude  the  story  of  a  defalcation  or 
suicide  by  the  statement  that  the  crime  was  committed 
as  a  result  of  speculation;  and  similar  instances  of  ruined 
lives  come  so  frequently  under  the  observation  of  every 
one  that  such  statements  are  taken  as  a  matter  of  course 
and  need  little  verification. 

When  any  one  seeks  to  get  a  bond  for  the  faithful  per- 
formance of  trust,  one  of  the  questions  asked  is,  "Do  you 
speculate?  "  The  writer  knows  of  a  case  where  a  reference 
wrote,  "I  give  this  man  the  highest  recommendation  in 
every  respect  except  that  he  will  speculate."  The  indem- 
nity company  refused,  even  in  such  a  case,  to  give  the 
bond.  While  holding  no  brief  for  the  speculative  ex- 
changes, and  while  trying  in  no  degree  to  minimize  their 
faults,  let  us  seek  a  historical  explanation. 

A  Historical  Explanation 

In  the  evolution  of  business,  the  student  will  frequently 
note  that,  as  each  new  type  makes  its  appearance,  it  seems 
to  bring  with  it  some  form  of  abuse  or  perversion  to  which 
it  is  especially  subject.  But  as  time  goes  on,  and  business 
men  come  to  understand  the  new  activity,  and  come  to 
give  it  its  proper  place  in  the  commercial  system,  many  of 
these  abuses  disappear.  The  inertia  of  human  institutions 
seems  to  cast  a  shadow  of  prejudice  over  any  new  form  of 
activity;  and  those  who  enter  into  an  enterprise,  which  has 


200        VALUE  OF  ORGANIZED  SPECULATION 

not  been  fully  recognized  as  necessary  and  productive,  are 
not  likely  to  be  in  all  cases  the  most  scrupulous  or  conserv- 
ative in  the  community.  Hence,  looseness  in  morals  is 
more  prominent  in  those  forms  of  human  activity  which 
have  not  been  fully  tried  out  in  the  school  of  experience. 
Much  time  is  necessary,  it  would  appear,  to  build  up 
around  any  business  a  code  of  laws  and  customs  to  protect 
the  trade. 

Examples  of  this  prejudice  and  of  the  unscrupulous 
manner  in  which  a  new  form  of  business  is  conducted  are 
numerous.  The  introduction  of  the  modern  factory  sys- 
tem was  accompanied  by  grave  evils,  child  labor  being  the 
most  conspicuous.  Yet  there  is  a  pronounced  tendency,  as 
the  factory  system  has  progressed,  for  child  labor  and  other 
evils  to  be  eliminated.  The  lending  of  money,  too,  was 
thought  at  one  time  to  be  a  disgrace,  and  usury  laws,  even 
at  the  present  day,  are  a  relic  of  this  prejudice. 

Speculation  is  as  old  as  commerce,  but  organized  specu- 
lation is  a  recent  growth.  It  is  true,  the  germ  of  speculat- 
ive exchanges  can  be  traced  to  the  ancients;  but  it  is  little 
over  a  century  since  trading  upon  the  stock  exchanges  has 
assumed  great  prominence  as  an  economic  development, 
while  trading  in  commodities  on  a  large  scale  for  future  de- 
livery is  hardly  half  a  century  old.  The  abuses  which  were 
found  with  organized  speculation  from  its  start  are  such  as 
might  be  expected  to  find  lodgment  in  a  form  of  business 
which  so  closely  resembled  gambling.  Hence  the  evolu- 
tionist sees  nothing  at  which  to  be  surprised  in  the  history 
of  speculative  exchanges  or  the  faults  to  which  they  are 
subject;  and  he  notes  that  there  have  already  been  reforms 
which  are  proceeding  in  regular  evolutionary  order  to  right 
abuses.  For  there  is  growing  up  about  the  speculative  ex- 
changes, as  well  as  in  other  forms  of  business  which  are  in 
the  early  stage  of  development,  a  code  of  customs  and  laws 
and  a  fund  of  experience  which  will  in  time  adequately 
restrain  the  crudities  which  are  now  so  prominent. 


MORAL  AND  SOCIAL  VALUE  201 

Let  the  pessimist  take  from  the  shelves  of  his  library 
"Chapters  of  Erie,"  by  Charles  Francis  Adams,  Jr.;  let 
him  note  the  period  when  the  events  narrated  occurred; 
and  he  cannot  but  be  impressed  with  the  fact  that  in  former 
times  there  were  more  unscrupulous  financiers  than  at 
present. 

If  we  compare  the  evolution  of  different  forms  of  com- 
mercial activity,  we  find  organized  speculation  developing 
later  than  most  of  the  other  forms.  We  find  it  beginning 
low  in  the  scale,  and  when  we  compare  it  in  its  infancy  with 
industries  that  have  already  had  thousands  of  years  to  de- 
velop, it  suffers  from  such  a  comparison.  But  speculation 
is  all  activity  and  searching,  and  the  investigations  which 
it  brings  about  reform  not  only  itself  but  other  kinds  of 
business.  It  was  the  spirit  of  speculation  and  the  facilities 
offered  by  our  organized  markets  which  urged  on  some  of 
the  investigations  into  corporation  frauds  two  generations 
ago.  It  is  organized  speculation,  sobered  and  made  con- 
servative in  our  markets,  that  has  demanded  precautions 
to  make  that  speculation  safe;  and  which,  in  its  searching 
process,  will  weed  out  the  corporations  that  are  improperly 
managed. 

Speculation  in  commodities,  having  assumed  its  pre- 
sent form  at  a  later  period  and  being  less  understood,  has 
not  progressed  so  far  in  its  evolution  as  speculation  upon 
stock  exchanges.  Hence  most  of  the  complaints  at  present 
are  leveled  at  the  grain  and  cotton  exchanges.  Corners, 
for  instance,  are  at  the  present  day  more  numerous  upon 
such  exchanges  and  manipulation  is  probably  more  fre- 
quent; although  here  again  the  principle  of  newness  ap- 
pears in  a  reverse  position,  for  it  is  seldom  that  new  com- 
modities are  introduced  into  speculation,  while  new  issues 
of  securities  are  frequently  made  with  the  many  abuses 
which  attend  their  marketing. 

Summing  up  the  historical  explanation,  it  may  be  said 
that  organized  speculation  is  a  form  of  business  which  has 


202        VALUE  OF  ORGANIZED  SPECULATION 

been  introduced  in  comparatively  recent  years;  and,  like 
most  new  forms  of  business,  it  has  certain  moral  and  social 
abuses  connected  with  it.  Great  progress  has  been  made 
in  eliminating  these  abuses,  since  the  conservative  specula- 
tors find  that  it  is  for  their  interest  as  a  body  to  remove  all 
risks  possible.  Furthermore,  speculation  is  a  force  of  great 
activity,  which  rapidly  reforms,  not  only  itself,  but  other 
kinds  of  commerce. 


CHAPTER  VI 

THE   ALTERNATIVE 

A  Natural  Development 

ORGANIZED  speculation  has  its  evils.  No  one  has  attempted 
to  deny  that  fact.  These  evils  are  extremely  serious,  as  they 
involve  the  moral  development  of  the  commercial  world. 
Hence,  in  computing  the  value  of  organized  speculation,  we 
find  that,  in  its  most  important  aspect,  it  exists  as  a  dis- 
utility. Admit  what  its  advocates  claim  for  it,  —  that  it 
steadies  prices,  that  it  fixes  the  values  on  which  all  com- 
merce is  based,  that  it  specializes  functions  and  puts  the 
risks  of  the  community  on  a  special  class  which  voluntarily 
undertakes  them,  —  yet,  if  it  be  shown  that  its  net  effect 
makes  toward  moral  degradation,  it  can  have  no  real  value 
to  any  one. 

But  a  system  of  conducting  commerce  which  has  grown 
up  as  a  natural  evolution  cannot  be  lightly  put  aside;  and 
when  an  attempt  is  made  to  turn  backward  the  course  of 
development,  it  is  frequently  found  that  the  evil  features  of 
an  institution  persist  while  the  excellent  ones  perish  or  are 
modified.  If  the  present  status  of  an  institution  or  an  in- 
dustry be  taken  as  the  only  factor  which  determines  whether 
or  not  it  should  be  swept  away,  then  many  of  our  present 
arrangements  would  be  doomed.  For  instance,  it  might  be 
called  to  mind  that,  in  the  modern  system  of  manufacturing 
food  products  at  large  factories,  poisons  have  been  placed 
in  the  packages  put  up.  But  poisons  are  destructive  of 
human  life,  and  human  life  is  more  important  than  pro- 
cesses of  production.  Hence  might  follow  the  conclusion 
that  it  would  be  better  for  us  to  go  back  to  the  original  state 
in  which  each  family  produced  its  own  food.  But  such  a 


204        VALUE  OF  ORGANIZED  SPECULATION 

reductio  ad  absurdum  shows  the  falsity  of  the  above  argu- 
ment. It  is  the  same  with  speculative  exchanges  as  with  any 
form  of  evolutionary  development.  They  cannot  be  swept 
aside  by  any  fiat,  legislative  or  otherwise. 

The  Problem 

The  problem  is  so  to  reform  organized  speculation  that  it 
will  not  lose  its  place  as  a  step  in  human  development,  and 
at  the  same  time  to  strike  at  its  distinctly  evil  features. 
This  is  the  same  problem  that  presents  itself  in  connection 
with  many  another  social  institution;  and,  to  the  impatient 
reformer,  this  alternative  is  most  disheartening,  because  it 
is  readily  seen  that  it  is  impossible  for  the  people  to  learn 
how  to  use  the  perfect  instrument  of  a  fully  developed 
commercial  system  without  a  change  and  further  evolution 
in  human  nature,  which  at  the  least  would  require  centuries 
of  time.  And  those  who  rashly  seek  sweeping  reforms  are 
likely  to  attempt  the  abolition  of  features  that  are  not  a 
direct  cause  of  evil,  but  which,  on  the  contrary,  are  essen- 
tial to  organized  speculation  as  it  exists.  If  a  proposed 
reform  should  strike  at  an  essential  principle,  it  would,  if 
adopted,  so  bind  and  cripple  operations  upon  the  ex- 
changes that  we  could  have  no  really  free  market. 

For  the  underlying  principle  of  organized  speculation  is 
not  that  of  a  government  or  board  organization  which  may 
be  conceived  of  as  acting  in  a  body  to  determine  the  course 
of  prices.  On  the  contrary,  the  word  organization  and  its 
derivatives,  used  in  this  connection,  refer  to  the  fact  that  a 
number  of  men  are  so  united  that  they  may  act  individu- 
ally to  determine  prices  through  their  knowledge  of  the  de- 
mand and  supply.  The  organization  is  formed  to  remove 
friction  and  to  provide  a  perfectly  clear  field  on  which 
there  can  be  the  freest  interplay  of  the  different  commercial 
forces. 

Buying  and  selling,  then,  must  be  free  if  progressive 
organized  speculation,  as  usually  understood,  is  to  be 


THE  ALTERNATIVE  205 

retained.  A  trader,  for  instance,  should  be  allowed  to  buy 
before  he  sells  and  so  to  speculate  upon  the  bull  side  of  the 
market.  On  that  point  nearly  all  are  agreed;  but  some  are 
of  the  opinion  that  the  speculator  should  not  be  allowed  to 
sell  before  he  buys,  and  so  to  speculate  upon  the  bear  side. 
Yet  a  market  hi  which  a  trader  could  not  speculate  in  that 
way  would  not  be  a  free  market. 

A  Crippled  Market  ^ 

Considering  other  kinds  of  business,  it  is  seen  that  the 
dealer  has  the  right  to  sell  before  he  buys  and  that  short 
selling  is  by  no  means  uncommon.  If  the  same  freedom  be 
not  allowed  upon  the  exchanges,  the  result  is  only  a  crip- 
pled and  distorted  form  of  organized  speculation;  for  the 
fact  cannot  be  too  often  adverted  to  that  it  is  impossible  to 
constitute  a  market  solely  for  buyers  or  solely  for  sellers, 
and  if  you  cripple  the  selling  power,  you  cripple  also  the 
buying  power.  If  speculative  short  selling  be  shut  off,  the 
number  of  speculative  buyers  is  thus  necessarily  reduced, 
because  buyers  will  not  habitually  resort  to  a  market  in 
which  sellers  are  not  free  to  act.  If  the  sellers  are  limited  to 
those  who  have  heretofore  bought,  the  market  is  of  too 
restricted  and  narrow  a  character  to  be  called  an  organized 
market  in  the  modern  sense.  If  short  selling  were  abolished, 
our  speculative  exchanges  as  they  exist  to-day  would  also 
be  abolished.  It  is  not  a  supposedly  ideal  state  that  might 
exist  under  the  conditions  suggested,  but  rather  the  actual 
alternative  which  would  be  likely  to  exist,  that  should 
engage  the  attention  of  the  practical  reformer. 

Monopoly 

Examining  the  business  houses  as  they  compete  with  one 
another  in  the  field  of  industry,  it  is  noticeable  that  they 
are  by  no  means  of  equal  strength.  Indeed,  the  greatest 
diversity  exists  in  regard  to  their  size  and  in  regard  to  every 
other  element  which  makes  for  power  in  the  commercial 


206        VALUE  OF  ORGANIZED  SPECULATION 

world.  The  large  business  houses  are  usually  those  which 
have  been  successful  in  performing  some  service,  whatever 
it  may  be,  more  cheaply  or  efficiently  than  their  competi- 
tors. Thus  a  young  man,  by  entering  the  field  in  a  particu- 
lar business,  by  saving  his  profits  and  adding  them  to  his 
capital  each  year,  and  by  inducing  others  to  associate  them- 
selves with  him,  may  finally  cut  so  important  a  figure  that 
his  house  is  said  to  have  a  monopoly  or  semi-monopoly  in 
its  line.  Furthermore,  smaller  business  houses,  each  having 
had  greater  or  less  success,  may  unite;  and  the  combination 
may  do  so  much  business  that  it  comes  to  be  generally 
regarded  as  a  monopoly.  Yet  the  principal  reason  why  a 
large  combination  occupies  an  important  place  in  a  par- 
ticular industry  is  because  it  can  accomplish  a  service  more 
cheaply  or  more  efficiently  than  others  can. 

If  the  business  conditions  in  a  particular  line  are  made 
so  attractive  that  excessive  profits  are  reaped,  then  there 
is  always  potential  competition  ready  to  assert  itself.  For 
instance,  another  large  corporation  enjoying  a  preponder- 
ating influence  in  another  industry  may  conclude  to  extend 
its  activity  and  enter  the  field  which  presents  such  allure- 
ments. 

The  business  conditions  which  furnish  the  best  oppor- 
tunity for  a  competitor  to  enter  the  field  are  found  in  cases 
where  the  selling  price  of  the  finished  commodity  has  been 
forced  to  a  high  level,  or  where  the  purchase  price  of  the 
raw  material  is  very  cheap.  When  such  conditions  exist, 
competitors  of  all  kinds  are  likely  to  appear.  Even  a  small 
business  house  has  certain  advantages  which  enable  it  to 
enter  a  particular  field  and  compete  on  equal  terms  with  the 
large  company  or  trust;  and  there  have  been  notable  in- 
stances where  small  business  houses  acting  separately  have 
been  so  well  managed,  —  their  managers  having  personal 
supervision  and  direct  interest  in  conducting  the  business, 
• —  and  they  have  been  organized  upon  such  a  sound  finan- 
cial basis,  that  they  have  actually  driven  a  trust,  which  was 


THE  ALTERNATIVE  207 

supposed  to  have  monopolistic  power,  into  bankruptcy  and 
ruin. 

There  are  advantages  and  there  are  disadvantages  in 
conducting  business  upon  a  large  scale;  and,  at  the  same 
time,  there  are  advantages  and  disadvantages  of  an  oppo- 
site nature  in  smaller  enterprises.  But  what  is  an  advant- 
age in  one  form  of  organization  may  be  a  disadvantage  hi 
another.  Thus  the  manufacture  of  goods  in  large  quanti- 
ties can  be  so  systematized  that  the  large  manufacturer  has, 
in  that  respect,  the  advantage  as  regards  efficiency  over  his 
smaller  competitors;  but,  on  the  other  hand,  the  more  care- 
ful supervision  given  the  process  of  manufacture  by  the 
small  business  house  may  have  quite  the  opposite  tendency. 

The  views  above  expressed,  as  to  the  adequacy  of  natural 
business  tendencies  to  furnish  an  ultimate  settlement  of  the 
trust  problem,  are  by  no  means  shared  by  all  those  who 
discuss  the  subject.  Yet  it  is  believed  that  the  reason  why 
many  writers  and  speakers  are  of  the  opposite  opinion  is 
because  there  are  so  many  abuses  whereby  a  trust  profits 
which  are  considered  normal  as  a  matter  of  course,  but 
which,  nevertheless,  are  unfair  when  considered  from  an 
ideal  standpoint. 

To  examine  each  industry  in  detail,  to  note  how  a  surplus 
arises  to  this  factor  or  to  that  factor,  to  point  out  the 
methods  of  reform  which  will  give  to  each  its  just  reward, 
putting  all  on  an  equality  and  yet  securing  perfect  mobility 
and  every  feature  of  the  competitive  system,  is  the  most 
hopeful  and  the  best  opportunity  for  field  work  hi  the 
entire  realm  of  economics.  An  inquiry  which  sought  thus 
to  prove  inductively  the  thesis  stated  would,  let  it  be 
emphasized,  be  a  detailed  one;  and  the  investigator  would 
find  in  many  cases  that  a  factor  had  an  influence  quite  dif- 
ferent from  that  generally  supposed.  If  the  sweeping 
generalities  and  prejudices  which  becloud  the  subject  could 
be  got  rid  of,  it  would  be  found  that  a  system  might  be 
devised  whereby  competition  would  work  so  justly  that  the 


208        VALUE  OF  ORGANIZED  SPECULATION 

gross  inequalities  seen  at  present  would  many  of  them  dis- 
appear. In  the  meantime  a  proposition  may  be  stated  on 
which  all  will  agree,  —  one  which  brings  us  to  the  point 
where  the  question  of  monopoly  touches  the  question  of  the 
value  of  organized  speculation. 

No  small  business  house  in  its  competition  with  the  trust 
or  large  company  should  be  deprived  of  any  help  or  agency 
which  exists  as  a  natural  part  of  the  world  of  commerce. 
No  law  should  be  enacted,  no  system  of  tariff  or  taxation 
should  be  forced  upon  the  people,  giving  the  large  com- 
pany any  power  to  destroy  its  smaller  rival  which  does  not 
belong  to  it  from  its  natural  efficiency  or  economy  in  sup- 
plying its  service.  Furthermore,  the  legislator  should  be 
especially  careful  not  to  destroy  any  agency  which  already 
helps  to  put  the  small  business  house  on  an  equality  with 
its  larger  competitor.  The  above  considerations  are  suf- 
ficient to  show  the  point  at  which  the  question  in  hand 
touches  the  general  field  of  economics;  and  affords,  it  is 
believed,  a  sufficient  basis  for  a  discussion  of  risk-taking  as 
it  comes  into  relation  with  the  question  of  monopoly. 

Among  the  democratic  influences  of  commerce  which 
have  grown  up  by  voluntary  action,  and  which  serve  to 
give  the  smaller  business  house  advantages  equivalent  to 
those  enjoyed  by  the  large  company,  is  the  custom  of  in- 
surance. A  man  with  vast  business  interests  does  not  need 
insurance  so  much  as  small  operators,  because  his  interests 
are  usually  so  distributed  that  a  fire  would  not  be  likely  to 
destroy  all  of  his  plants  at  one  time.  But,  by  the  aid  of  in- 
surance, the  small  business  man  may  undertake  venture- 
some business  enterprises  and  compete  with  the  large  com- 
pany or  trust  on  more  favorable  terms. 

The  speculative  exchanges,  as  they  are  utilized  in  the 
process  of  marketing  and  distributing  commodities,  con- 
stitute a  kind  of  underwriting  organization  in  its  broader 
sense,  and  render  it  possible  for  men  of  moderate  means  to 
engage  in  a  wide  field  of  business  operations.  If  this  form 


THE  ALTERNATIVE  209 

of  insurance  were  abolished  or  crippled,  many  of  them 
would  find  no  profitable  employment  for  their  capital  or 
their  activities,  and  only  those  would  remain  who  have 
sufficient  capital  to  insure  themselves. 

The  speculative  exchanges  deal  in  commodities  or  securi- 
ties of  uncertain  value,  and  are  so  articulated  with  the 
commercial  system  that  the  business  houses  which  are  pro- 
ducing and  distributing  these  commodities  can  be  relieved 
of  the  risks  which  come  from  changes  in  price  in  different 
periods  of  time.  But,  in  the  absence  of  this  form  of  insur- 
ance, the  small  merchant  or  manufacturer  could  not  with 
safety  continue  his  dealings.  The  alternative  naturally 
offered  is  that  of  a  large  business  house  with  numerous 
branches  which  would  assume  the  risks  and  conduct  the 
trade. 

Such  a  business  enterprise  would  naturally  take  the 
modern  form  of  a  corporation  or  trust  and  would  be  able 
to  look  at  things  from  a  different  standpoint  from  that  of  the 
small  business  man.  It  would  be  possible  for  it  to  gain  con- 
trol of  the  production  of  a  commodity,  and  to  handle  all  the 
processes  from  the  raw  stage  to  the  completed  product  as 
it  enters  into  consumption.  A  company  of  this  sort  would 
make  the  packages  in  which  the  product  of  its  plant  is  to  be 
carried;  and,  if  the  commodity  were  bulky,  it  would  have 
much  to  do  with  its  transportation  in  the  various  stages  of 
manufacture.  A  company  with  such  a  wide  control  could 
dictate  prices  within  certain  limits,  and  hence  would  not  be 
subject  to  many  of  the  risks  of  the  small  business  house. 
Whether  such  a  system  be  advantageous  or  not,  where  it 
naturally  grows  up  without  adventitious  aid,  it  will  be 
recognized  on  all  hands  that  it  should  not  be  allowed  to 
establish  itself  by  forcibly  destroying  the  insuring  or  con- 
serving institutions  which  would  otherwise  give  the  small 
business  man  a  chance  to  compete  on  an  equality  with  his 
larger  rivals. 

Turning  to  the  wheat  trade  as  an  instance,  if  the  small 


210        VALUE  OF  ORGANIZED  SPECULATION 

buyer  could  not  have  his  insurance  against  fluctuations  in 
price,  he  would  be  at  a  distinct  disadvantage.  No  one,  in 
such  a  case,  could  engage  in  the  business  of  buying  and 
carrying  wheat  unless  he  had  a  large  amount  of  capital 
which  he  was  willing  to  use  in  this  manner.  The  people 
who  would  naturally  undertake  this  function  would  be  the 
large  millers  and  exporters  of  the  cereal.  They  would  enter 
into  this  branch  of  the  business  because,  in  the  absence  of  the 
facilities  afforded  by  the  exchanges,  they  could  take  these 
risks  with  less  cost  than  any  one  else,  as  they  would  have 
greater  control  of  the  flour  market  and  of  the  movements  of 
wheat,  and  are  affiliated  to  some  extent  with  the  different 
transportation  and  distributing  interests.  Through  their 
influence  in  these  directions  and  by  the  direct  aid  of  the 
factors  of  commercial  power  within  their  control,  they 
could  reduce  much  of  the  risk.  But  much  of  it  would  still 
remain  for  which  they  would  need  to  be  compensated; 
and  they  would  get  such  compensation  under  the  laws  of 
competition. 

At  present  most  of  the  cost  of  risks  in  the  prices  of  com- 
modities traded  in  on  the  exchanges  are  paid  in  the  ulti- 
mate analysis  by  the  amateur  speculators  who  run  these 
risks  because  of  their  gambling  instincts,  and  who,  seeking 
to  win  from  others,  lose  their  own  money.  The  losses  of  the 
unskilled  speculators  go,  part  of  them  to  pay  the  commis- 
sions, interest,  and  other  charges,  but  another  large  part 
goes  to  pay  the  penalty  of  buying  at  high  prices  and  selling 
at  low  prices. 

This  enormous  sum  of  money,  consisting  of  the  losses  of 
the  amateur  speculators  over  and  above  the  cost  of  main- 
taming  the  machinery  of  organized  speculation,  is  highly 
important  in  this  discussion;  and  the  places  to  which  it 
goes  should  be  dwelt  upon  and  emphasized.  This  money 
is  lost,  partly  because  of  the  weakness  in  human  nature  and 
partly  because  of  market  manipulations  set  on  foot  with 
the  express  purpose  of  getting  it.  But  the  market  manipu- 


THE  ALTERNATIVE  211 

lators  do  not  get  all  of  it  by  any  means.  In  the  babel  of  the 
pit,  no  one  is  certain  as  to  exactly  who  may  be  the  principal 
in  a  deal  which  a  broker  is  offering  to  make.  Thus  an  ad- 
venturing speculator,  in  his  usual  gambling  way,  may  put 
over  an  order  to  buy,  say  10,000  bushels  of  wheat,  and  his 
broker  will  bid  for  it.  The  wheat  may  be  bought  of  another 
adventurer  or  gambling  speculator  or  of  some  professional; 
or  it  may  be  bought  from  a  producer  of  the  cereal  who  will 
afterwards  deliver  it,  thus  marketing  his  commodity,  we 
will  say,  at  a  good  price.  In  this  way,  under  our  present 
system,  the  unsuccessful  speculator  pays  the  penalty.  He 
pays  the  commissions  and  charges;  and  he  pays  most  of  the 
profits  which  the  successful  speculator  gets;  and  he  pays 
the  difference  between  normal  prices  all  the  year  round  and 
the  higher  prices  which  prevail  part  of  the  year  by  reason 
of  the  corners  and  squeezes  upon  the  exchanges. 

If,  however,  the  present  system  of  handling  commodities 
of  rapidly  fluctuating  values  were  done  away  with,  and  the 
business  undertaken  by  a  monopoly,  it  would  be  con- 
ducted upon  a  strictly  business  basis.  There  would  be  no 
greenhorns,  or  amateurs,  or  unsuccessful  speculators  to 
pay  expenses  or  profits  to  any  one.  A  corporation  having 
its  grip  upon  the  market  for  the  raw  material  and  for  the 
completed  product  could  at  times  suffer  large  losses  and 
still  be  able  to  show  excellent  average  yearly  dividends 
upon  the  additional  capital  invested  to  carry  on  this  de- 
partment of  the  business. 

In  so  far  as  the  returns  on  capital  are  the  compensation 
for  risks  undertaken  by  the  monopoly,  no  one  will  question 
that  it  should  be  compensated,  it  being,  under  the  condi- 
tions supposed,  the  best  agency  at  hand  to  bear  these  risks. 
But  the  question  is  relegated  to  the  citizen  to  determine, 
whether  he  be  in  favor  of  having  the  risk  undertaken  by  a 
monopoly  in  this  way,  the  compensation  for  it  of  course 
entering  into  the  price  of  the  commodity  to  the  consumer, 
or  whether  he  prefers  the  present  system,  under  which  the 


212        VALUE  OF  ORGANIZED  SPECULATION 

risks  are  borne  by  a  distinct  class  of  capitalists  set  off  for 
such  risk-taking,  many  of  whom  make  no  net  profit  at  any 
time,  and  who  pay,  not  only  the  expenses  of  conducting  the 
exchanges,  but  the  profits  of  the  manipulators  and  higher 
prices  to  the  producer  as  well. 

We  have  here  a  most  interesting  question  of  practical 
ethics  combined  with  an  economic  problem.  It  is  not  the 
purpose  of  this  essay  to  discuss  any  purely  ethical  ques- 
tion, but  merely  to  point  out  the  place  at  which  individuals 
find  themselves  in  such  a  position  that  they  are  obliged 
either  to  deal  or  to  refuse  to  deal  with  persons  who  are 
acting  in  a  non-ethical  spirit. 

Personally  the  writer  holds  the  opinion  that  it  is  not 
morally  wrong  for  the  community  to  avail  itself  of  the 
commercial  advantage  of  dealing  with  a  set  of  traders,  even 
though  these  traders  may  be  acting  in  the  gambling  spirit 
or  from  other  uncommercial  motives.  To  carry  out  any 
other  doctrine  consistently  would  require  that  our  legisla- 
tors interfere  with  industry  at  every  hand,  such,  for  exam- 
ple, as  the  production  of  commodities  which  might,  or 
might  not,  be  used  for  the  good  of  the  community. 

As  shown  in  other  parts  of  this  essay,  the  demoralization 
of  speculation  is  not  necessarily  more  than  that  of  any  busi- 
ness in  which  there  is  the  gambler's  chance  of  success  or 
failure.  Risks  are  necessary;  and  the  mere  fact  that  traders 
insist  on  taking  them  when  they  are  not  properly  equipped 
for  such  an  undertaking  should  not  cause  us  to  turn  a  free 
market  into  one  which  is  not  subject  to  the  competitive 
principle. 

For  the  problem  in  this  case  is  different  from  that  which 
is  ordinarily  presented  in  the  question  of  monopoly,  so- 
called,  versus  a  free  market.  Under  present  conditions  the 
large  company  and  its  affiliated  interests  find  themselves 
underbid  in  many  cases  by  the  risk-takers  upon  the  ex- 
changes. If  the  trust  could  perform  the  service  with  less 
cost  than  it  could  be  performed  upon  the  exchanges,  then  it 


THE  ALTERNATIVE  213 

would  be  able  to  drive  them  out  of  business  or  leave  them 
as  pure  gambling  institutions.  But  the  large  company  can- 
not do  this.  It  cannot  bid  as  high  prices  for  the  commodity 
to  the  producer,  and  it  cannot  run  these  risks  as  cheaply  for 
the  community,  as  they  are  run  by  the  speculators  upon  the 
exchanges.  For  many  of  the  speculators  run  the  risks  for 
nothing,  being  driven  to  it  by  the  love  of  gambling  or  specu- 
lative excitement  afforded  by  the  system  of  organized 
speculation.  Hence  we  have  a  case  in  which  the  opponents 
of  monopoly  can  make  a  stronger  showing  than  they  usu- 
ally do.  For  we  have  here  the  inchoate  trust  or  large  com- 
pany actually  asking,  not  only  that  it  be  allowed  full  liberty 
to  devour  its  weaker  competitors  singly,  but  that  the  law 
step  in  and  actively  assist  it  in  so  gaining  a  mastery.  The 
strong  and  unharmed  Horatius,  not  satisfied  with  the 
stratagem  of  separating  his  wounded  opponents  and  slaying 
them  one  by  one,  calls  on  the  arbiters  to  step  in  and  fight 
his  battles  by  butchering  his  enemies  for  him. 

Such  a  demand  as  this  needs  but  to  be  stated  to  show  its 
unreasonableness.  It  is  true  that,  under  existing  institu- 
tions, instances  may  be  pointed  out  in  which  the  state  or  the 
people  collectively  do  take  sides  against  smaller  economic 
units  and  assist  the  monopolists  in  driving  them  to  the  wall. 
Nevertheless,  all  reformers  who  seek  after  commercial 
freedom  should  exert  themselves  in  the  opposite  direction. 
The  doctrine  ought  to  be  advanced  that  any  unfairness 
in  taxation  or  elsewhere  in  our  present  laws  must  be  abol- 
ished so  that  a  free  field  with  no  favors  can  be  extended  to 
the  different  economic  factors.  But  the  present  condition 
of  affairs  should  not  be  altered  by  striking  down  any  fac- 
tors which  are  distinctly  competitive  in  their  nature. 

The  speculative  exchanges  are  distinctly  competitive. 
They  are  voluntary  organizations  in  which  the  economic 
units  move  over  one  another  with  the  facility  with  which 
the  molecules  of  a  liquid  body  arrange  and  readjust  them- 
selves to  suit  the  more  rigid  bodies  which  surround  them. 


214        VALUE  OF  ORGANIZED  SPECULATION 

With  all  their  faults  they  constitute  the  chosen  field  upon 
which  the  larger  and  smaller  units  have  a  chance  to  com- 
pete under  approximately  equal  conditions. 

A  Four-sided  Contest 

In  the  case  of  some  industries,  the  trust  or  quasi- 
monopoly  exercises  its  power  with  such  discretion,  and 
respects  the  rights  of  others  with  such  discriminating  care, 
that  it  does  not  pay  for  outsiders  to  enter  the  field.  Such  a 
trust,  powerful  alike  by  reason  of  its  size  and  of  its  tactful 
management,  may  in  some  cases  overshadow  a  speculative 
exchange  that  stands  in  its  way.  It  would  thus  deaden 
speculation  and  relieve  itself  of  the  disturbing  influence  of 
the  exchange.  There  are,  however,  but  few  instances  in 
which  a  trust  is  able  to  accomplish  this  result. 

The  sources  from  which  the  speculative  exchange  de- 
rives its  power  are  not  the  same  as  those  which  lie  at  the 
basis  of  the  influence  of  trusts;  for  the  men  who  specialize 
and  make  trading  upon  the  exchanges  their  business  are  of 
a  different  type  or  temperament  from  the  monopolist  or 
would-be  monopolist.  The  men  who  trade  upon  the  ex- 
changes, whether  they  be  amateurs  or  manipulators,  are  of 
the  speculative  type  of  mind.  They  are  of  the  type  of  men 
to  whom  uncertainties  are  pleasant,  whether  it  be  the  legi- 
timate risks  of  business  or  the  purposely  created  hazards  of 
gambling  games. 

Trusts,  however,  are  formed  by  those  who  wish  to  escape 
risks  and  who  place  their  interests  in  the  hands  of  the  spec- 
ulative promoter,  because  he  tells  them  that  he  will  put 
them  in  such  a  position  that  they  will  be  able  to  control  the 
situation  in  their  particular  industry.  For,  back  of  all  the 
formalities  in  the  organization  of  a  trust,  we  find  first  a 
number  of  business  men  who  are  dissatisfied  with  the  price 
that  they  are  getting  or  the  price  that  they  are  paying; 
and  they  are  combined  by  some  man  of  nerve  and  energy 
who  bears  the  burden  of  most  of  the  risk  and  worry.  The 


THE  ALTERNATIVE  215 

promoter  of  a  trust,  then,  is  a  man  who  performs  for  the 
constituent  companies  the  same  service  which  the  specu- 
lator performs  for  business  men  in  many  lines,  —  that  is  to 
say,  he  relieves  them  of  certain  risks.  And  he,  quite  unlike 
the  men  that  he  unites  in  a  trust,  is  affiliated  with  stock 
exchanges  and  is  often  a  speculator  himself. 

The  risks  entered  into  by  those  who  trade  upon  the 
speculative  exchanges  are  shown  by  the  fact  that  very  few, 
even  if  successful  for  a  time,  permanently  secure  large 
fortunes;  while  the  cautious  nature  of  those  whose  plants 
are  combined  into  trusts  is  shown  by  the  fact  that  they 
usually  take  preferred  stock  for  their  share,  leaving  to  the 
speculative  promoter  the  common  stock,  which  he  can  use 
in  operations  upon  the  exchange. 

A  man  who  has  put  his  property  into  the  trust  form  of 
organization  may  be,  and  often  is,  led  into  the  speculative 
markets  in  financing  the  company.  Nevertheless,  for  the 
reasons  just  indicated,  it  will  in  most  cases  be  found  that 
the  manufacturers  who  control  the  constituent  companies 
of  a  trust  seldom  become  imbued  with  the  spirit  of  specula- 
tion. For  the  psychological  tendency  that  makes  men  seek 
those  callings  for  which  nature  has  fitted  them  will  land  one 
man  in  a  speculative  exchange  as  an  operator  there,  and 
another  at  the  head  of  a  manufacturing  house,  with  his 
interest  centring  in  methods  of  production  and  in  fixing 
prices  which  buyers  must  pay,  rather  than  in  profiting  by 
fluctuations  in  price. 

As  a  result  of  these  psychological  tendencies,  we  have  the 
facts  alluded  to  above  —  that  a  powerful  company  seeking 
after  a  monopoly  will,  wherever  possible,  crush  out  or 
cripple  an  exchange  dealing  in  the  commodity  which  it 
attempts  to  control.  But  most  exchanges  are  of  a  lusty 
growth,  and  usually  overshadow  any  attempt  at  monopoly 
which  may  appear.  As  before  explained,  the  operations 
upon  the  exchanges  are  determined  by  the  fact  that  most 
traders  are  amateurs,  and  that  the  large  operators  and 


216        VALUE  OF  ORGANIZED  SPECULATION 

manipulators  are  men  such  as  understand  how  to  work 
upon  the  gambling  instincts  of  the  amateurs  and  so  get 
their  money.  Hence  we  have  two  battles  going  on  at  once. 
There  is  the  battle  on  the  floor  of  the  exchange  between  the 
amateurs  and  the  professional  speculators,  and  there  is  the 
battle  taking  place  everywhere  between  the  large  company 
and  its  smaller  competitors.  Two  influences,  each  of  which 
has  a  powerful  tendency  toward  artificial  prices,  have  each 
a  separate  foe.  But  these  influences  are  antagonistic  to  one 
another,  and  their  foes  also  are  antagonistic.  Besides  the 
battles  above  referred  to,  there  are  numerous  minor  strug- 
gles and  cross-currents  in  this  swaying  mass  of  competing 
economic  units.  But  the  contest,  at  least  in  some  of  its 
aspects,  assumes  the  form  of  a  four-sided  battle  in  which  it 
is  impossible  for  any  party  really  to  gain  the  mastery. 

In  the  hearings  before  the  different  Congressional  com- 
mittees that  have  investigated  the  expediency  of  anti- 
option  laws,  and  in  articles  in  newspapers  and  elsewhere, 
we  frequently  find  the  arguments  of  large  companies  or 
trusts  which  seek  to  exercise  a  preponderating  influence  hi 
certain  industries.  In  these  arguments  the  attentive  stu- 
dent of  human  nature  will  discern  a  note  of  impatience  if 
not  of  anger  on  the  part  of  men  who  were  accustomed  to 
having  their  own  way  about  things,  but  now  had  come  in 
contact  with  a  force  offering  many  obstacles  to  the  accom- 
plishment of  their  designs  which  they  did  not  understand. 
Thus  it  would  appear  that  a  man  of  high  integrity,  brought 
up  in  a  school  of  business  where  things  are  done  in  a  certain 
regular  and  orderly  manner,  who  by  long  control  of  vast 
business  interests  has  become  dictatorial,  perhaps  showing 
more  of  a  dictatorial  spirit  than  he  ought  to,  cannot  conceal 
the  fact  that  he  is  somewhat  ruffled  at  the  cavalier  manner 
in  which  he  and  his  interests  have  been  treated  on  the 
speculative  exchanges. 

This  incompatibility  with  something  which  balks  his 
well-meant  desires  and  proceeds  in  such  a  riotously  free- 


THE  ALTERNATIVE  217 

and-easy  manner  to  perplex  and  dash  his  most  mature 
counsels,  results  in  irritation;  it  brings  clearly  to  his  vision 
the  gambling  features  of  the  exchanges,  and  helps  to  rivet 
on  his  mind  the  idea  that  they  depress  the  prices  of  agri- 
cultural products.  Hence  these  trust  managers,  many  of 
whom  are  excellent  customers  for  the  produce  of  the 
farmer,  become  enthusiastic  in  their  advocacy  of  anti- 
option  laws;  and  seek  to  sweep  the  speculative  exchanges, 
so  fraught  with  immorality,  and  at  the  same  time  with  in- 
dependence, from  the  face  of  the  earth. 

A  producer  of  a  commodity  which  is  sold  upon  the 
speculative  exchanges  may,  if  he  wishes,  place  his  crop  in  a 
car  and  ship  it  to  the  nearest  market  to  be  sold  by  sample 
upon  the  floor  of  the  exchange;  or  he  may  put  it  in  store 
and  deliver  the  warehouse  receipt  in  execution  of  a  future 
contract.  But  he  is  not  obliged  to  take  the  trouble  of  ship- 
ping to  the  exchange  market  in  order  to  get  the  benefit  of 
its  facilities.  The  value  of  the  product  at  his  station  bears 
a  certain  relation  to  its  price  at  the  central  market;  he  has 
as  good  access  as  his  local  dealer  to  the  exchange  quota- 
tions, and  can  detect  any  tendency  to  conceal  conditions 
or  take  advantage  in  any  way.  He  has  these  quotations 
always  before  him,  showing  on  what  basis  large  transac- 
tions are  conducted  in  the  centres  of  trade,  and  is  fortified 
by  custom  in  asking  that  even  his  small  transaction  be 
given  the  same  consideration  as  that  of  the  larger  producer 
or  dealer.  So  well  are  these  facts  appreciated  that  wheat, 
cotton,  and  other  products  which  are  dealt  in  on  the  specu- 
lative exchanges  are  favorite  commodities  for  production 
by  the  farmer  or  planter. 

Those  commodities  which  are  not  dealt  in  for  future 
delivery  upon  the  exchanges,  however,  have  not  these  ad- 
vantages, although  of  course  there  are  limits  to  the  length 
to  which  controlling  interests  may  go.  For  instance,  the 
beet-sugar  factory  could  not  afford  to  do  business  on  the 
basis  of  an  utterly  unfair  price  for  beets,  because  such  a 


218        VALUE  OF  ORGANIZED  SPECULATION 

course  would  only  result  in  the  farmer  abandoning  the  cul- 
ture of  that  product  in  ensuing  seasons.  Nevertheless,  in 
the  case  of  commodities  not  dealt  in  on  the  exchanges,  the 
buyer  for  the  large  company  may  on  occasion  show  great 
independence;  and,  if  careful  to  select  the  time,  may  so 
conduct  his  buying  that  the  company  will  get  the  benefit 
of  any  surplus  which  might  develop  in  particular  seasons. 

Some  lands  are  especially  adapted  to  tobacco,  to  sugar 
cane,  or  some  other  particular  crop;  and  the  grower  will 
endure  at  times  unfair  exactions  rather  than  abandon  the 
culture  of  his  accustomed  specialty.  Tobacco,  for  instance, 
is  a  crop  which  is  not  made  the  subject  of  active  specula- 
tion upon  the  exchanges,  and  there  are  no  quotations  for 
futures  to  guide  the  planter  in  disposing  of  his  crop,  and  no 
organized  market  to  which  he  could  send  it  in  case  he  could 
not  get  a  fair  offer  from  the  local  buyer.  Hence  some  de- 
scription of  the  manner  in  which  tobacco  is  bought  may 
throw  light  on  the  question  of  trust  control  as  an  alternative 
to  the  dominance  of  a  market  furnished  by  organized  specu- 
lation. The  following  excerpts  from  Congressional  hearings 
contain  the  gist  of  much  of  them  and  describe  important 
features  of  the  customs  prevailing  in  the  tobacco  trade  as  to 
buying  the  commodity :  — 

"It  has  been  the  custom  for  the  past  four  years  for  one 
buyer  to  come  to  a  barn  and  make  one  bid  on  that  tobacco, 
and,  generally  speaking,  he  does  not  come  any  more.  He 
comes  and  says,  'I  will  give  you  4|c,'  or,  *I  will  give  you 
three  and  one,'  or  *I  will  give  you  something  else';  and  it  is 
that  or  nothing.  Most  frequently  we  will  not  have  another 
opportunity  of  selling."  1 

The  buyer  "came  to  my  house  and  made  me  an  offer  for 
my  tobacco,  and  I  knew  that  I  had  to  sell,  for  there  was  no 
other  way  in  the  world  to  sell  it,  no  other  recourse,  and  I 

1  Statement  of  F.  G.  Ewing  before  a  subcommittee  of  the  Finance 
Committee  of  the  United  States  Senate,  Sen.  Doc.  No.  372,  2d  Sess.,  59th 
Cong.,  p.  54. 


THE  ALTERNATIVE  219 

sold  it  to  him.  He  was  on  his  way  to  one  of  my  neighbors. 
We  had  telephones  in  the  house,  and  I  telephoned  to  my 
neighbor  before  this  buyer  got  to  his  house,  and  told  him 
that  he  had  better  take  the  first  offer;  that  unless  he  did, 
he  would  knock  him  down.  The  neighbor  could  not  take 
the  offer  that  day,  because  his  share  hands  and  tenants 
were  not  convenient,  and  he  could  not  take  the  liberty  of 
selling  their  tobacco  without  their  consent  and  authority. 
So  the  buyer  said  to  him,  *  You  had  better  take  this  offer; 
when  I  come  to-morrow  I  will  give  you  less/  In  two  days 
from  that  time  this  neighbor  went  to  accept  the  former 
proposition  and  he  knocked  him  down  a  hundred  dollars 
on  a  $600  crop;  and,  gentlemen,  he  kept  going  lower  and 
lower  until  he  got  $250  below  the  first  offer." l 

When  the  trade  in  a  commodity  is  large  enough  to  make 
it  pay  to  form  some  kind  of  a  trust  or  combination,  and 
where  there  is  no  speculative  exchange  with  its  open 
market  to  determine  prices,  we  have  this  form  of  trust  con- 
trol. The  outward  appearances  of  the  buying  trusts  or 
combinations  are  different,  as  particular  trades  are  con- 
ducted according  to  their  own  special  customs;  but  every- 
where, under  the  conditions  mentioned,  we  have  a  buying 
trust  or  combination  to  keep  prices  down  and  control  the 
markets.  Live  hogs,  for  instance,  are  not  traded  in  for 
future  delivery  upon  the  exchanges,  and  the  method  by 
which  they  are  bought  when  they  reach  the  large  centres 
shows  the  same  preponderating  control  of  market  condi- 
tions which  has  been  described  in  the  tobacco  market.  Oil 
also  is  an  example.  Where  the  number  of  buyers  is  few, 
and  the  commodity  regularly  dealt  in,  the  expedient  of  mak- 
ing some  kind  of  arrangement  whereby  bidding  shall  be  re- 
stricted is  so  obvious  that  it  is  idle  in  such  case  to  expect 
that  there  will  be  a  free  market. 

Some  day,  no  doubt,  all  these  things  will  be  reformed, 
and  business  customs  and  laws  so  changed  that  the  buying 
1  Statement  of  Charles  H.  Fort.  Ibid.,  p.  117. 


220        VALUE  OF  ORGANIZED  SPECULATION 

trust  will  not  be  able  to  secure  any  unfair  advantage  over 
the  producer.  The  trusts  themselves  may  be  reformed  so 
that  the  potential  competition  always  present  may  be  a 
more  powerful  influence,  or  new  competition  may  be  intro- 
duced to  diminish  their  power.  No  one  can  prophesy  as  to 
what  will  be  the  system  in  actual  use  generations  hence. 
But,  for  the  present,  it  has  been  abundantly  shown  that 
the  speculative  exchanges,  with  all  their  faults,  do  intro- 
duce an  important  competing  element  into  the  calculations 
of  those  who  would  like  to  become  monopolists,  and  that 
the  general  tendency  of  the  speculative  markets  is  toward 
the  democratization  of  industry,  and  toward  giving  every 
man  the  opportunity  to  do  business  and  to  work  up  from 
small  beginnings  in  his  particular  line  of  trade. 

A  Democratic  Institution 

The  markets  furnished  by  organized  speculation  repre- 
sent the  most  complete  development  of  the  competitive 
system  and  of  democracy  in  trade,  as  opposed  to  mono- 
poly and  concentration  of  wealth  and  power.  Upon  the 
exchanges,  any  one  may  deal,  even  though  he  have  no  ex- 
tensive plant  or  arrangements  for  carrying  commodities; 
and,  if  he  trade  rightly,  he  may  feel  assured  that  he  is  car- 
rying a  part  of  the  great  staples  of  commerce,  and  casting 
his  influence  in  the  direction  of  fixing  such  prices  that 
industry  may  be  directed  to  those  channels  in  which  its 
efficiency  and  its  economy  will  be  most  perfectly  realized. 
At  the  same  time  other  business  men  outside  the  exchanges 
may  rely  upon  the  option  system  to  protect  them  against 
business  vicissitudes  which  would  otherwise  cause  them  to 
abandon  the  field  and  leave  it  only  to  monopolists  or  semi- 
monopolists. 

Thus  organized  speculation  represents  freedom  of  action 
and  at  the  same  time  cooperation  and  division  of  labor  and 
of  functions.  It  is  the  people  working  with  separate  wills 
and  yet  organized  so  completely  that  they  accomplish  cer- 


THE  ALTERNATIVE  221 

tain  purposes  by  joint  action.  Like  a  bank  which  gathers 
money  from  different  depositors  and  then  uses  it,  some- 
times in  large,  sometimes  in  small  amounts,  to  further  the 
business  development  of  the  country,  so  the  speculative  ex- 
changes gather  the  money  of  a  number  of  capitalists;  and, 
through  the  business  system  described  herein,  they  furnish 
the  method  and  the  capital  whereby  the  small  dealers  upon 
the  outside  are  insured  against  certain  losses  and  many  of 
them  enabled  to  continue  in  business  on  approximately 
equal  terms  with  larger  companies  or  semi-monopolies. 

Such  are  some  of  the  ideal  aspects  of  organized  specula- 
tion considered  as  an  alternative  to  monopoly  and  the  con- 
centration of  wealth  and  power.  The  faults  that  go  with  it 
are  the  same  as  those  of  any  form  of  democracy  or  freedom. 
They  originate,  in  their  ultimate  analysis,  in  the  weak- 
nesses of  human  nature,  especially  as  it  seems  almost  im- 
possible for  the  average  man  to  understand  financial  mat- 
ters. The  troubles  of  the  speculator  are  such  as  he  has 
entered  into  of  his  own  accord;  for  no  one  is  obliged  to  spec- 
ulate. It  is  only  when  the  people  become  so  educated  in 
finance,  that  they  can  appreciate  and  understandingly  use 
a  free  market,  that  the  speculative  exchanges  will  appear 
in  their  true  light  as  the  most  important  enemies  of  mono- 
poly and  privilege  of  all  sorts. 

A  Monopoly  of  Commissions 

Notwithstanding  the  considerations  brought  forward  in 
the  last  heading  and  the  fact  that  they  can  scarcely  be 
given  too  much  emphasis,  there  is  one  direction  in  which 
they  should  be  qualified.  The  cosmopolitan  character  of 
the  exchanges  and  the  freedom  and  independence  which 
they  promote  among  their  members  all  tend  toward  breadth 
of  vision.  Hence,  as  a  class,  the  members  of  exchanges  are 
broad-minded  men.  Yet  they  are  not  always  free  from  that 
narrow  spirit  which  prevails  outside;  and,  when  the  brokers 
have  in  mind  the  question  of  commissions,  they  are  anxious 


222        VALUE  OF  ORGANIZED  SPECULATION 

to  exclude  all  those  except  their  immediate  associates  from 
participation  in  business  opportunities.  No  labor  union,  no 
trust,  no  monopoly  or  attempted  monopoly  can  be  more 
jealous  of  prerogatives  than  are  the  members  of  exchanges 
in  regard  to  commissions. 

The  important  exchanges  usually  have  commission  rules 
which  carefully  prescribe  the  minimum  charges  on  each 
class  of  business,  and  against  those  who  appear  as  competi- 
tors the  boycott  is  rigorously  applied.  Exchanges  furnish 
their  quotations  to  similar  institutions  located  so  far  away 
that  they  cannot  be  competitors  and  to  exchanges  which 
deal  in  non-competing  lines,  but  not  to  actual  competitors; 
and  benefits  that  might  accrue  to  the  commercial  world 
from  their  organization  are  carefully  held  back  wherever 
possible  if  it  appear  that  any  share  of  the  profits  is  in 
danger.1 

It  should  be  noted,  however,  that  this  policy  is  not  con- 
cerned with  the  function  of  exchanges  as  regulators  and 
directors  of  commerce,  in  which  capacity  their  influence 
always  makes  for  independence  and  against  monopoly, 
but  only  with  the  compensation  that  brokers  charge  for 
their  services.  It  may  further  be  stated  that  these  commis- 
sions are  unimportant  compared  with  the  other  business 
interests  involved;  that  they  are  small  compared  with  com- 
missions outside  the  exchanges;  and  that  the  spirit  which 
is  shown  is  no  different  from  that  displayed  by  business 
men  in  other  lines. 

Real  Gambling 

Considering  now  the  effect  of  organized  speculation  upon 
the  individual  and  the  admitted  evils  and  sorrows  to  which 
the  speculator  of  the  usual  type  is  subjected,  the  question 

1  For  a  description  of  the  methods  used  by  the  New  York  Stock 
Exchange  against  its  neighbor  the  Consolidated  Stock  and  Petroleum 
Exchange,  cf.  testimony  before  the  Pujo  Committee  investigating  the 
"  Money  Trust,"  June  12,  1912. 


THE  ALTERNATIVE  223 

naturally  arises  as  to  whether  there  is  no  alternative  in  the 
individual  case.  Might  not  the  unsuccessful  speculator  be 
taken  from  the  exchanges  and  put  to  work  at  some  calling 
to  which  he  is  adapted,  thus  leaving  the  speculative  markets 
in  control  of  those  professional  operators  who  understand 
technical  conditions  and  who  would  thus  promote  the  wel- 
fare of  the  people  by  their  trading? 

In  most  cases  the  answer  must  be  in  the  negative.  The 
misguided  unsuccessful  speculators  are  not  those  who  have 
entirely  mistaken  their  calling.  They  are  the  ones  who 
would  naturally  take  the  legitimate  risks  of  the  commun- 
ity and  who  are  stepping  forward  to  perform  their  intended 
function.  The  difficulty  is  that  they  have  not  the  ability, 
the  industry,  the  training,  or  the  capital,  to  undertake  those 
risks  in  the  most  effective  manner.  They  are  like  many  of 
our  unsuccessful  lawyers,  doctors,  merchants,  farmers,  or 
manufacturers.  They  are  attracted  toward  the  callings 
for  which  they  are  most  nearly  fitted;  but,  owing  to  defects, 
they  do  not  meet  with  success.  This  evil  of  amateurism  is 
further  aggravated  by  the  fact  that,  at  the  present  stage  of 
human  development,  there  are  very  few  persons  born  who 
can  cope  with  conditions  in  the  speculative  markets,  while 
at  the  same  time  the  fascinating  nature  of  the  speculator's 
ideal  makes  the  number  of  those  seeking  his  rewards  even 
greater  than  in  other  fields  of  endeavor.  But  these  thous- 
ands of  persons,  driven  on  by  their  natural  propensity  to 
take  risks,  and  this  propensity  further  intensified  and  made 
abnormal  by  various  conditions,  must  have  some  way  of 
gratifying  their  desires;  and  the  desires  of  the  natural 
risk-taker,  when  inhibited  or  perverted,  frequently  become 
the  passion  of  the  gambler. 

If  the  markets  of  the  world  are  closed  to  the  speculator, 
he  will  seek  that  excitement  which  he  craves  in  real  gam- 
bling. There  are  abundant  facilities  at  hand  whereby  he 
can  gratify  his  perverted  instincts;  for,  as  rapidly  as  one 
form  of  gambling  is  stopped  by  law  or  passes  out  of 


224        VALUE  OF  ORGANIZED  SPECULATION 

fashion,  another  is  invented  to  take  its  place.  There  are 
the  race-track,  the  hand-book,  policy,  and  all  the  numerous 
forms  which  alternate  with  one  another  in  popular  favor. 
They  have  no  redeeming  features.  They  not  only  lend 
themselves  to  satisfy  the  gambling  passions  of  the  very 
poor,  but  work  their  way  into  every  crack  and  corner  of  the 
social  fabric. 

Speculations  upon  the  exchanges,  however,  even  when 
taken  at  their  worst,  have  their  services  in  the  world  of  com- 
merce, and  do  not  as  readily  present  themselves  to  the  poor, 
for  they  require  in  most  cases  larger  sums  of  money  than 
are  necessary  in  games  of  chance.  The  broker's  office  is 
not  a  place  where  a  man  of  small  means  would  naturally 
feel  at  home;  and  the  knowledge  that  there  are  places 
where  one  may  speculate  upon  the  rise  and  fall  of  securities 
and  commodities  is  not  so  widely  diffused  as  is  the  case  in 
regard  to  games  of  chance.  Further,  the  circumstances 
which  urge  on  the  gambler  carry  him  to  greater  extremes 
than  in  the  case  of  the  speculator.  The  exchange  hours  are 
short  and  are  usually  in  the  daytime.  The  systematic  use 
of  alcohol  to  urge  on  the  speculator  is  comparatively  infre- 
quent. Games  of  chance,  too,  may  be  undertaken  even 
without  any  gambling-house  or  extensive  apparatus:  but 
two  persons  in  the  mood,  and  a  few  of  the  simplest  tools  are 
all  that  is  necessary. 

Furthermore,  there  is  use  in  speculation,  while  there  is 
none  in  games  of  chance.  Let  us  take  organized  specula- 
tion at  its  very  worst,  and  admit  that  most  of  the  deals 
made  upon  the  speculative  exchanges  are  mere  adventures 
by  irresponsible  parties  filled  with  the  gambling  instinct. 
Yet  there  are  legitimate  transactions  as  well;  and  even  the 
haphazard  dealings  of  the  amateur  speculators,  which  do 
so  much  injury  to  the  community  in  every  way,  have  re- 
deeming features  and  accomplish  some  good,  all  of  which 
is  discussed  under  the  head  of  "hedging,"  and  in  other 
parts  of  this  essay. 


THE  ALTERNATIVE  225 

Thus,  in  considering  the  matter  as  a  question  of  alterna- 
tives, it  is  seen  that  organized  speculation  cannot  be  carried 
to  the  length  that  gambling  can  in  oppressing  the  poor  and 
demoralizing  the  individual;  and  even  when  taken  at  its 
worst,  organized  speculation  is  of  important  indirect  use 
to  the  commercial  world,  while  gambling  is  of  no  use.  When 
gambling  is  abolished,  it  will  be  time  to  consider  the  ques- 
tion of  whether  it  be  really  expedient  to  stop  speculation 
upon  the  exchanges.  While  such  an  alternative  as  that  of 
gambling  exists,  reformers  and  purists  might  better  devote 
their  energies  to  abolishing  it,  rather  than  weaken  their 
case  by  attacking  something  which  has  many  strong  points 
in  its  favor. 

Unorganized  Speculation 

But  gambling  is  not  the  only  alternative  which  may  be 
offered  for  organized  speculation.  If  the  exchanges  were 
closed,  many  who  now  resort  to  them  would  doubtless  con- 
tinue in  speculation,  but  it  would  be  of  the  unorganized 
type.  Speculations  could  be  carried  on  in  the  very  commo- 
dities now  dealt  in  upon  the  exchanges,  but  the  special  fac- 
ilities would  be  absent.  As  shown  heretofore,  such  dealings 
would  be  much  restricted  compared  with  those  which  now 
exist;  and  they  would  be  made  in  a  market  where  bear 
speculation  would  be  almost  impossible. 

The  restricted  form,  furthermore,  is  free  from  many  of 
the  evils  which  attend  organized  speculation.  Probably 
it  can  be  said  with  perfect  fairness  that  unorganized  specu- 
lation is  less  like  gambling  than  the  organized  kind; 
and  many  persons  who  regard  organized  speculation  with 
horror  have  no  objection  to  speculative  dealing  outside  of 
the  exchanges. 

Unorganized  speculation  lends  itself  even  in  lesser  de- 
gree than  the  organized  kind  to  those  who  have  but  small 
capital  and  who  wish  for  rapid  action.  The  method  of  trans- 
ferring commodities  is  cumbersome;  and  the  speculator 


226        VALUE  OF  ORGANIZED  SPECULATION 

cannot  ruin  himself  so  quickly  as  in  the  case  of  organized 
speculation,  since  he  necessarily  has  more  time  for  reflec- 
tion before  undertaking  a  deal.  Furthermore,  the  scalping 
which  prevails  upon  the  speculative  exchanges,  and  gives 
dealings  thereon  a  strong  resemblance  to  gambling,  is  ab- 
sent in  the  case  of  unorganized  speculation. 

The  important  feature  lacking  in  the  case  of  unorgan- 
ized speculation  is  a  continuous  market  in  which  the  specu- 
lator can  unload  in  case  he  changes  his  mind.  In  real  es- 
tate dealings,  this  absence  of  a  continuous  market  is  keenly 
felt.  The  market  for  real  estate  in  a  particular  city  may 
be  advancing  rapidly,  and  the  speculators  with  accumu- 
lated profits  may  be  buying  everything  that  is  offered. 
But  suddenly  the  change  comes  and  the  market  is  demoral- 
ized, the  speculator  finding  himself  with  a  piece  of  real 
estate  upon  his  hands  with  no  demand  and  a  heavy  mort- 
gage. Then  follows  the  slow,  blood-sucking  process  by 
which  he  is  tied  down,  perhaps,  for  the  remainder  of  his  life, 
with  the  continued  round  of  interest,  taxes,  insurance,  and 
other  expenses. 

The  writer  holds  no  brief  for  the  system  of  trading  as 
it  exists  upon  the  exchanges,  but  in  one  respect  at  least 
it  causes  less  social  and  moral  injury  to  the  community 
than  unorganized  speculation.  For,  if  at  any  time,  a  specu- 
lator upon  the  organized  markets  wishes  to  shake  off  the 
gambling  spell  and  discontinue  speculation,  he  can  readily 
do  so.  He  may  order  his  deals  closed,  or  his  broker  will  do 
that  anyway  if  his  margin  be  exhausted;  and  he  will  thus 
be  free  to  quit  speculation  if  he  wishes  and  engage  in  any 
other  kind  of  business.  But  the  speculator  in  a  market  which 
is  not  continuous  may  be  drawn  on  for  life  in  the  most 
hopeless  grind.  He  finds  himself  with  unsalable  property 
on  his  hands,  which  is  usually  mortgaged;  and,  in  giving 
the  mortgage,  the  speculator  has  given  his  note.  Hence, 
unless  he  defaults  on  his  note,  he  is  bound  to  keep  on  pay- 
ing interest  on  a  debt  that  is  much  beyond  his  resources. 


THE  ALTERNATIVE  227 

It  has  been  the  peculiar  fortune  of  the  writer  to  be  asso- 
ciated all  his  life  with  different  speculators  —  those  who 
speculate  upon  the  exchanges  and  those  who  speculate  in 
real  estate  where  there  is  no  organization.  He  has  seen  in 
most  cases  nothing  but  losses  and  misery  come  to  either 
kind  of  speculator.  But  the  greatest  misery  and  loss  — 
the  largest  number  of  ruined  lives  that  he  has  seen  —  have 
come  from  the  unorganized,  not  from  the  organized,  kind 
of  speculation. 

Speculative  Business 

It  is  difficult  to  draw  the  line  as  to  where  speculation 
leaves  off  and  other  trading  or  business  begins.  Any  risks 
taken  in  a  business  way  are  considered  by  many  persons  as 
speculation.  But  it  seems  better  to  confine  the  term  in  its 
strict  sense  to  the  taking  advantage  of  fluctuations  in  the 
prices  of  property,  and  to  use  the  term  speculative  business 
to  designate  commercial  undertakings  in  which  there  are 
great  hazards,  of  a  general  nature.  This  kind  of  business 
may  be  considered  as  an  alternative  to  organized  specula- 
tion. 

We  must  consider  human  nature  as  it  is,  not  as  it  is  sup- 
posed to  be.  If  there  were  not  the  facilities  of  the  organ- 
ized exchanges  whereby  the  business  men  of  a  speculative 
or  gambling  turn  of  mind  could  gratify  their  propensities, 
they  would,  many  of  them,  seek  some  sort  of  speculative 
venture  in  the  line  of  their  own  business.  This,  in  many 
cases,  would  be  the  best  alternative  offered;  for,  if  a  person 
be  dominated  with  the  common  passion  for  risk-taking, 
his  recklessness  would  not  be  as  likely  to  lead  him  to  ruin 
in  the  case  of  a  business  which  he  knows  as  in  one  of  which 
he  knows  nothing.  Nevertheless,  the  risks  of  business  are 
so  great  that,  even  in  one's  particular  line,  there  is  danger 
of  over-extension.  There  is  an  infatuation  in  the  business 
which  one  has  selected  as  a  young  man  and  followed  in 
succeeding  years.  When  the  mind  is  narrowed  to  a  parti- 


228        VALUE  OF  ORGANIZED  SPECULATION 

cular  vocation,  the  world's  different  commercial  interests 
are  seen  in  a  distorted  perspective;  and  one  is  likely  to  esti- 
mate his  previous  successes  too  highly,  and  to  place  too 
great  a  reliance  on  his  abilities  and  his  resources. 

A  business  man  once  said  to  the  writer,  that,  whenever  a 
merchant  extended  his  business,  it  was  well  to  be  suspicious 
of  his  credit.  The  remark  was  of  course  an  exaggerated 
one,  and  was  intended  as  sarcasm  or  humor  rather  than  an 
actual  working  rule  in  granting  credits;  but  it  contains 
the  germ  of  truth  which  is  only  confirmed  by  its  humor. 
There  have  been  so  many  cases  of  failure  shortly  after  busi- 
ness extension  that  it  would  seem  well  worth  the  while  of 
a  credit  man  at  least  to  make  an  investigation  in  such  a 
case. 

In  truth  all  business  is  risky,  as  is  seen  in  the  statistics  of 
failures;  and  any  one  may  note  from  the  experience  of  his 
friends  and  acquaintances  the  great  risks  which  all  business 
houses  run.  Some  of  the  most  glaring  weaknesses  in  human 
nature  are  shown  in  the  conduct  of  businesses  which  are  regu- 
lar and  legitimate  in  every  way.  After  a  successful  season 
the  natural  optimism  and  egotism,  which  exist  to  a  greater 
or  less  degree  in  all  of  us,  may,  for  the  moment,  unbalance 
the  judgment  of  even  the  most  level-headed;  and  at  such 
a  time  the  arguments  for  extension  appear  especially  plaus- 
ible. Money  has  been  made  by  a  particular  form  of  busi- 
ness operation;  and  what  course  could  be  wiser,  it  is  natur- 
ally argued,  than  to  extend  the  plant  and  facilities  along 
the  same  lines  which  have  proved  so  successful?  Further- 
more, since  the  profit  of  the  business  is  much  larger  than 
the  current  interest  for  borrowing  money,  why  not  borrow 
enough  to  extend  operations  and  do  business  on  a  large  scale 
and  so  make  increased  profits?  But  alas,  such  reasoning 
as  the  above  has  led  to  more  suicides  and  more  failures 
than  even  the  speculative  markets.  The  present  season 
may  not  be  like  the  last  one.  Hard  times  are  always  alter- 
nating with  prosperity,  and  general  conditions  which  the 


THE  ALTERNATIVE  229 

business  man  cannot  control  are  likely  to  result  in  disaster; 
while  the  constant  shifting  of  commercial  centres  and  of 
profitable  lines  of  trade  render  all  calculations  extremely 
uncertain. 

But  speculative  business  is  not  seen  at  its  worst  in  the 
cases  where  the  merchant  or  manufacturer  extends  his  own 
business.  The  seductive  glory  of  posing  as  a  local  capital- 
ist and  of  spreading  into  different  fields  is  even  more  dan- 
gerous in  its  allurements.  Hope  characterizes  the  organ- 
izer of  any  business,  whether  he  be  a  promoter  selling  stock 
in  some  large  and  distant  enterprise,  or  a  business  man 
seeking  to  interest  his  neighbors  in  a  local  venture  or  in- 
vestment. 

Many  a  man  who  has  done  well  in  the  business  which  he 
learned  in  his  youth  has  put  his  surplus  into  some  form  of 
speculative  business,  and,  as  a  result,  has  lost  all  that  he 
had.  At  the  time  when  some  outside  venture  of  this  sort  is 
contemplated,  the  situation  seems  safe  enough.  Even  a 
conservative  man  may  reason  that  in  his  present  business 
he  has  something  which  is  always  safe  and  profitable,  and 
it  may  appear  to  him  that  it  is  only  his  surplus  which  he  is 
risking  in  the  proposed  enterprise  where  there  is  the  possi- 
bility of  the  large  profits  such  as  he  has  heard  are  made  by 
men  of  great  originality  and  force  in  venturesome  enter- 
prises. 

But  the  kind  of  reasoning  referred  to  is  dangerous  in  the 
extreme,  for  the  new  enterprise  is  quite  likely  to  require 
more  capital  than  was  contemplated.  It  being  of  a  specu- 
lative or  venturesome  nature,  some  of  those  who  agreed  to 
go  into  it  may  change  their  minds;  and  those  who  have  al- 
ready put  in  enough  to  start  it  may  feel  that  they  must  see 
it  through  in  order  to  save  what  has  already  been  put  in. 
Hence  we  find  that  a  man  who  has  been  enticed  into  such  a 
venture  may  draw  on  his  old  and  established  business  to 
get  further  funds,  until  finally  both  business  enterprises 
show  debts  and  losses,  and  the  erstwhile  conservative  and 


230        VALUE  OF  ORGANIZED  SPECULATION 

comfortable  merchant  or  manufacturer  is  obliged  to  go 
into  bankruptcy. 

If  it  be  intended  to  enter  into  any  form  of  speculative 
venture,  it  is  believed  that  it  is  better  to  resort  directly  to 
margin  transactions  upon  a  commercial  exchange  than  to 
enter  into  speculative  business.  Or,  as  has  been  shown  in 
a  previous  section,  if  the  business  man  will  be  careful 
enough  to  purchase  his  stocks  outright,  or  at  least  to  have 
a  large  margin,  he  will  find  that  the  speculative  exchanges 
offer  a  field  in  which  he  can  so  invest  his  surplus  that  it  will, 
in  most  cases,  serve  as  a  second  line  of  defense;  as  a  help  to 
him,  not  a  burden,  in  case  of  business  reverses. 

To  sum  up;  speculative  business  is  a  good  alternative 
to  organized  speculation  in  many  cases,  inasmuch  as  most 
men  know  their  own  business  better  than  any  form  of  out- 
side speculation  or  investment.  But  business  men  often 
overestimate  their  own  powers,  and  hence  make  the  great 
mistake  of  extending  their  business  by  going  into  debt  in 
order  to  make  such  extension,  or  of  entering  into  reck- 
less outside  business  ventures.  If  speculation  upon  small 
margins  in  the  haphazard  gambling  spirit  could  only  be 
eliminated,  the  surplus  of  the  business  man  could  best  be 
invested  in  the  speculative  markets  under  the  advice  of  an 
expert;  for  organized  speculation  if  properly  conducted,  is 
safer  than  speculative  business. 

Evasion 

The  discussion  of  alternatives  to  organized  speculation 
has  been  entered  into  with  a  view  to  showing  its  actual  value 
to  the  community  by  imagining  the  conditions  that  would 
most  likely  exist  were  it  suddenly  destroyed.  Looking  at 
the  question  from  a  practical  standpoint,  however,  there  is 
no  alternative.  The  only  effect  of  a  law  abolishing  it  would 
be  to  restrict  its  operations.  Let  us  suppose,  for  instance,  a 
law  to  be  enacted  with  a  prohibitive  tax  upon  short  selling. 
Such  a  law  if  enforced  would  mean  the  abolition  of  an 


THE  ALTERNATIVE  231 

essential  feature  of  organized  speculation;  and,  to  those 
who  believe  that  an  institution  can  thus  be  destroyed, 
would  appear  final. 

But  that  belief  is  a  most  deceptive  one.  To  find  illustra- 
tions we  do  not  need  to  confine  ourselves  to  this  country, 
with  the  power  in  its  courts  to  declare  null  and  void  any 
act  of  the  legislature  which  they  may  deem  contrary  to  the 
constitution;  but,  to  take  restriction  at  its  best,  we  can 
refer  even  to  Germany  —  a  country  where  laws  are  strictly 
enforced,  and  in  which,  so  it  happens,  measures  of  a  similar 
character  have  been  enacted. 

The  German  anti-bourse  law  of  1896  not  only  had  the 
government  behind  it,  but  it  was  backed  by  public  opinion, 
especially  by  the  agrarians  and  others  of  power  and  influ- 
ence. Yet  the  law  was  evaded,  and  had  an  effect  very  dif- 
ferent from  what  its  supporters  had  intended.  Some  of  the 
forms  of  evasion  which  the  Germans  found  effective  are  de- 
pendent upon  their  peculiar  customs,  —  for  instance,  upon 
the  fact  that  the  banks  hi  Germany  play  a  larger  part  than 
they  do  here  in  the  buying  and  selling  of  securities.  There- 
fore no  attempt  will  be  made  to  describe  the  special  cus- 
toms of  which  the  Germans  availed  themselves  in  picking 
out  particular  features  of  the  law  to  evade.  We  in  this 
country  could  not  use  all  of  these  methods;  but  the  Ameri- 
cans could  be  depended  upon  to  invent  new  and  interesting 
schemes  of  evasion  that  would  be  even  more  effective  than 
those  which  the  Germans  adopted. 

Furthermore,  when  other  methods  appear  too  cumber- 
some or  difficult,  there  would  remain  at  least  the  favorite 
method  by  which  the  Germans  evaded  their  anti-bourse 
law;  namely,  that  of  trading  in  a  foreign  exchange.  The 
Germans  used  Amsterdam,  Paris,  London,  and  other  for- 
eign markets.  In  this  country,  if  we  had  an  anti-option 
law,  and  if  some  attempt  should  be  made  to  enforce  it, 
the  gram  speculator  would  substitute  Toronto  or  Winnipeg 
on  the  letter  or  telegram,  while  the  speculator  in  stocks  or 


232        VALUE  OF  ORGANIZED  SPECULATION 

cotton  would  use  the  Canadian  or  English  exchanges,  with 
a  possible  resort  to  the  Continental  bourses. 

The  workings  of  the  law  in  Germany  served  to  inhibit 
the  best  features  of  organized  speculation  rather  than  the 
worst  ones.  The  speculative  adventurer  found  little  in- 
convenience in  telegraphing  his  orders  abroad  or  resorting 
to  other  means  of  evasion;  while,  in  the  decade  following 
the  enactment  of  the  law,  that  country  appears  to  have 
entered  into  a  period  of  speculative  business  and  gambling 
excitement  which  was  much  more  unsound  than  that  of  any 
other  European  country  at  the  time. 

The  good  which  is  accomplished  by  organized  specula- 
tion in  the  way  of  furnishing  opportunities  for  hedging  was 
interfered  with;  and  the  absence  of  regular  quotations  for 
German  grain,  while  it  by  no  means  brought  trade  to  a 
standstill,  was  nevertheless  an  inconvenience.  The  eva- 
sion of  the  law  was  so  general,  and  the  dissatisfaction  with 
its  workings  was  so  widespread,  that  it  was  amended  in 
1908  and  its  radical  provisions  repealed. 

Possibly  the  attempt  of  this  country  to  prohibit  what 
was  called  trading  in  gold  in  1864  may  be  referred  to  as  an 
example  of  a  repressive  law  of  this  sort  which  was  enforced; 
for  it  is  generally  conceded  that,  during  the  brief  time  the 
law  was  on  the  statute-books,  there  was  little  trading  in 
gold.  But  the  circumstances  which  surround  the  case  are 
such  that  the  instance  proves  nothing. 

During  the  Civil  War  the  promises  of  the  Government 
were  circulated  as  money.  Their  value  depreciated  as  com- 
pared with  the  standard,  and  they  became  the  object  of 
speculation.  Through  motives  supposedly  patriotic  the 
speculation  was  conducted  on  the  assumption  that  the 
value  of  the  greenbacks  was  constant  and  that  the  standard 
itself  was  fluctuating.  Hence  the  speculation  was  nomin- 
ally in  gold,  and  when  the  greenbacks  fell  in  value,  it  was 
said  that  "gold"  was  going  up.  In  order  to  check  this 
decline  in  the  Government's  promises  as  measured  by  an 


THE  ALTERNATIVE  233 

assumed  rise  in  "gold,"  a  law  was  enacted  prohibiting  that 
form  of  speculation.  The  law  was  put  in  operation  on  the 
21st  of  June,  1864;  but  it  caused  such  an  "advance"  in  the 
value  of  "  gold  "  (really  a  decline  in  the  value  of  greenbacks) 
that  the  law  was  almost  immediately  repealed,  the  bill  for 
the  repeal  being  signed  by  the  President  on  July  2. 

The  law  was  enacted  after  little  debate  in  the  midst  of  a 
war  in  which  the  life  of  the  nation  was  involved.  Its  enact- 
ment was  so  sudden  and  it  was  repealed  so  soon  afterwards 
that  there  was  not  time  to  organize  a  system  of  evasion; 
and  in  no  other  country  was  there  an  exchange  where  a 
speculator  could  trade  on  the  comparative  value  of  gold 
and  of  the  promises  to  pay  of  the  United  States  Govern- 
ment. 

Reforms  in  Method 

There  will  always  be  some  form  of  organized  speculation 
and  that  form  must  retain  short  selling  and  other  essential 
features.  This  is  seen  in  the  fact  that  organized  specula- 
tion has  come  about  as  a  voluntary  development  and  that 
it  performs  a  useful  function.  It  is  childish  to  attempt  to 
base  a  commercial  society  upon  Utopian  dreams.  He  who 
would  influence  human  actions  must  take  institutions  that 
he  finds  at  hand  and  mould  them  to  suit  his  purposes.  It 
would  be  futile  for  the  reformer  to  attempt  actually  to 
create  an  institution  or  to  annihilate  one.  He  might  as  well 
attempt  to  create  or  destroy  physical  matter.  The  only 
practicable  alternative  for  organized  speculation  as  it  exists 
is  so  to  reform  it  that  it  will  exercise  that  function  for  which 
it  appears  to  be  fitted. 

Organized  speculation  is  perverted  when  an  attempt  is 
made  to  use  it  as  a  means  of  gambling  or  to  further  any 
form  of  injustice.  It  would  not  be  tolerated  for  a  moment 
if  it  were  not  for  the  fact  that  there  are  those  who  use  it  for 
legitimate  commercial  purposes;  and  the  number  and  im- 
portance of  those  who  so  use  it  must  be  increased.  At 


234        VALUE  OF  ORGANIZED  SPECULATION 

present  any  gambler  may  enter  the  speculative  exchanges 
and  in  the  gambling  spirit  make  trades  which  to  him  have 
all  the  evil  effects  of  gambling.  How  to  frame  a  law  so  as 
to  accomplish  the  desired  reform  is  one  of  the  most  delicate 
problems  of  statesmanship.  The  reforming  of  organized 
speculation  should  be  the  concern,  not  so  much  of  legisla- 
tures as  of  our  commercial  statesmen  within  the  exchanges, 
whose  interest  it  is  to  see  that  the  methods  of  these  ex- 
changes are  in  accordance  with  the  best  business  standards. 

In  England,  in  1877,  a  Royal  Commission  was  appointed 
to  inquire  into  the  constitution  and  customs  of  the  London 
Stock  Exchange.  The  investigation  that  resulted  was  a 
thorough  one;  many  witnesses  were  heard,  and  in  1878  the 
report  was  issued.  Numerous  recommendations  were  made 
in  this  report,  and,  while  several  of  them  were  willingly 
adopted  by  the  exchange,  others  did  not  result  in  any  ac- 
tion either  by  the  Government  or  the  exchange.  The  abuses 
complained  of,  however,  have  their  recent  prototypes,  and 
the  problems  can  better  be  studied  with  reference  to  present 
American  conditions. 

At  a  later  date  the  Imperial  Government  of  Germany 
appointed  a  commission,  somewhat  similar  to  the  English 
one,  to  investigate  the  workings  of  the  exchanges  and  sug- 
gest reforms.  In  November  1893  the  labors  of  the  commis- 
sion were  concluded  and  its  report  issued.  Although  the 
recommendations  were  conservative  and  recognized  the 
usefulness  of  a  properly  conducted  exchange,  the  Reichstag 
did  not  confine  itself  to  the  measures  recommended  in  the 
report,  but  enacted  the  radical  law  of  1896,  previously 
mentioned. 

After  the  panic  of  1907  in  this  country,  Governor  Hughes 
of  New  York  appointed  a  committee  to  investigate  "what 
changes,  if  any,  are  advisable  in  the  laws  of  the  state  bear- 
ing upon  speculation  in  securities  and  commodities,  or  re- 
lating to  the  protection  of  investors,  or  with  regard  to  the 
instrumentalities  and  organizations  used  in  dealing  in  se- 


THE  ALTERNATIVE  235 

curities  and  commodities  which  are  the  subject  of  specula- 
tion." The  committee,  after  numerous  hearings,  reported 
on  June  7,  1909. 

This  report,  like  those  in  Germany  and  England,  is  a 
conservative  one,  and  it  has  resulted  in  several  reforms  in 
the  method  of  conducting  speculative  business  upon  the 
New  York  Stock  Exchange  and  elsewhere.  Its  recommen- 
dations being  recent,  and  covering  a  wide  field,  will  be  con- 
sidered under  the  appropriate  headings. 

Exchanges  that  are  not  Exchanges 

It  is  significant  that  when  reformers  seek  to  point  out 
the  evils  of  exchange  trading,  they  begin  with  institutions 
that  are  not  exchanges  hi  a  strict  and  proper  sense.  There 
are  counterfeit  markets  which  are  given  the  form  of  ex- 
changes merely  for  the  purpose  of  deceiving  the  public. 
The  reason  why  those  who  would  thus  defraud  give  their 
schemes  the  form  of  organized  speculation  is  because  they 
know  that  the  public  (notwithstanding  its  frequent  criti- 
cism) has  much  confidence  in  the  free  market  furnished  by 
the  exchanges. 

In  the  battle  with  the  bucket  shops  the  officers  of  the  law 
frequently  found  that  a  bucket  shop,  instead  of  masking 
as  a  broker's  office,  would  pretend  that  it  was  in  itself  an 
exchange,  and  that  quotations  for  stocks  were  actually 
made  within  its  walls.  The  elaborateness  with  which  the 
machinery  of  an  exchange  was  counterfeited  and  the  care 
with  which  the  proprietors  of  the  place  acted  their  parts 
was  most  curious. 

In  order  that  the  so-called  trading  might  be  carried  on 
in  the  name  of  something  that  was  not  purely  the  product 
of  imagination,  an  unsuccessful  mine  which  had  been  duly 
incorporated  would  be  purchased  by  the  proprietors  of  the 
bucket  shop  and  dummy  officers  installed,  who  would  be 
ready  to  issue  the  share  certificates  to  any  one  who  wished 
to  buy  and  pay  for  the  stock.  But  of  course  no  one  desired 


236        VALUE  OF  ORGANIZED  SPECULATION 

to  make  an  actual  purchase  of  a  stock  which  had  no  value. 
The  reason  for  acquiring  the  corporation  was  to  use  its 
stock  as  a  basis  for  fictitious  quotations  which  were  to  be 
issued  for  gambling  purposes. 

All  the  forms  of  an  exchange  were  carefully  simulated. 
Some  of  the  employees  of  the  proprietor  were  designated  as 
"brokers,"  and  went  about  among  the  so-called  "traders" 
in  the  room  soliciting  orders.  Every  five  minutes  one  of 
these  "brokers"  would  receive  by  wire  an  alleged  order  to 
buy  one  of  the  stocks.  He  would  bid  for  it  the  same  as  a 
real  broker,  and  another  of  the  "brokers"  would  pretend 
to  sell  it  to  him.  The  "quotation"  would  go  upon  the 
blackboard,  and  would  be  sent  out  to  other  bucket  shops 
by  a  special  ticker  service  and  form  the  basis  of  a  consid- 
erable amount  of  "trading."  This  manner  of  conducting 
a  counterfeit  exchange  was  called  "working  the  tape  game." 
The  instance  is  mentioned  merely  to  show  the  lengths  to 
which  gamblers  will  go  in  order  to  make  a  counterfeit 
appear  like  a  real  exchange.1 

But  the  fraudulent  use  of  the  name  exchange  is  not  con- 
fined to  giving  a  cloak  to  gambling  operations.  There  are 
exchanges,  so  called,  which  exist  for  the  purpose  of  estab- 
lishing a  market  price  at  which  owners  of  property  are 
induced  to  sell.  For  instance,  the  committee  appointed  by 
Governor  Hughes,  in  describing  the  Mercantile  Exchange 
in  New  York  as  it  existed  at  the  time  the  report  was  made, 
used  the  following  language:  "The  published  quotations 
are  made  by  a  committee,  the  membership  of  which  is 
changed  periodically.  That  committee  is  actually  a  close 
corporation  of  the  buyers  of  butter  and  eggs,  and  the  prices 
really  represent  their  views  as  to  the  rates  at  which  the 
trade  generally  should  be  ready  to  buy  from  the  farmers  and 
country  dealers."  2 

1  Cf .  Hill,  Gold  Bricks  of  Speculation,  chap.  vi. 

2  Report  of  Governor  Hughes' s  Committee  on  Speculation  in  Securities  and 
Commodities,  p.  21. 


THE  ALTERNATIVE  237 

Similarly,  in  describing  the  method  of  conducting  the 
Metal  Exchange,  the  committee  has  this  to  say:  "In  spite 
of  the  apparent  activity  of  dealings  in  this  organization  in 
published  market  reports,  there  are  no  actual  sales  on  the 
floor  of  the  Metal  Exchange,  and  we  are  assured  that  there 
have  been  none  for  several  years.  Prices  are,  however, 
manipulated  up  and  down  by  a  quotation  committee  of 
three,  chosen  annually,  who  represent  the  great  metal-sell- 
ing agencies  as  their  interest  may  appear,  affording  facili- 
ties for  fixing  prices  on  large  contracts,  mainly  for  the 
profit  of  a  small  clique,  embracing,  however,  some  of  the 
largest  interests  in  the  metal  trade."  1 

The  committee  recommended  that  the  charters  of  these 
exchanges  be  revoked,  but,  on  account  of  the  publicity 
afforded  by  the  committee's  report,  the  officers  and  mem- 
bers have  taken  measures  to  eliminate  clique  control  and 
to  make  their  exchanges  true  markets. 

As  heretofore  explained,  all  transactions  not  made  during 
the  regular  session  of  the  exchange  in  the  exchange  hall 
are  called  curb  trades.  The  tendency  is,  however,  when 
curb  trading  becomes  important,  for  the  particular  commo- 
dities or  securities  so  traded  in  to  be  admitted  for  trading 
in  some  exchange  or  for  a  new  exchange  to  be  organized 
for  their  benefit.  The  securities  which  have  not  been 
listed  for  trading  on  the  New  York  Stock  Exchange  would 
naturally  develop  an  exchange  on  which  trading  in  them 
could  be  conducted.  But  the  formal  organization  of  such 
an  exchange  is  prevented  by  the  fact  that  it  is  principally 
through  members  of  the  New  York  Stock  Exchange  that 
trading  in  these  outside  securities  is  conducted,  and  that  the 
constitution  of  the  exchange  prohibits  its  members  from 
engaging  in  transactions  on  any  other  organized  stock 
exchange  in  New  York. 

These  conditions  have  resulted  in  an  open-air  market, 
which  is  held  on  Broad  Street  during  stock  exchange  hours. 

1  Report  of  Governor  Hughes  s  Committee,  p.  21. 


238        VALUE  OF  ORGANIZED  SPECULATION 

Those  who  trade  in  this  curb  market  have  no  formal  or- 
ganization, yet  all  tacitly  concur  in  certain  rules  and  cus- 
toms, observance  of  which  gives  the  appearance  in  some 
respects  of  an  exchange.  But  the  public  associate  any 
trading  in  stocks,  especially  that  transacted  by  stock  ex- 
change members,  with  the  exchange  itself,  and,  when  scan- 
dal results,  the  whole  system  of  organized  speculation  is  con- 
demned. The  Hughes  Committee,  apparently  recognizing 
that  there  is  some  point  in  this  attitude  of  the  public, 
recommended  rules  for  the  regulation  of  business  upon  the 
curb  and  particularly  for  the  admission  of  securities  to  quo- 
tation. Such  rules  could  be  readily  enforced  in  view  of  the 
fact  that  a  large  proportion  of  the  traders  on  the  curb  are 
stock  exchange  members  who  could  be  controlled  by  rules 
of  the  exchange.1 

The  fact  that  something  similar  to  an  exchange  will 
arise,  even  in  cases  in  which  the  traders  are  seeking  to  avoid 
the  appearances  of  one,  and  the  fact  that  the  committee  in 
seeking  reforms  recommends  a  closer  approximation  to  an 
exchange,  are  excellent  illustrations  of  the  value  and  serv- 
ices of  organized  speculation. 

When  circumstances  are  such  that  there  is  need  for  a 
commercial  exchange,  one  must  be  created,  even  if  the  form 
adopted  be  of  a  perverted  or  crippled  character  as  in  the 
examples  just  given.  The  reformer  should  bend  his  ener- 
gies to  change  the  laws  and  customs  of  the  exchanges  so 
that  any  perverted  forms  of  exchange  trading  that  may 
appear  will  be  made  to  assume  the  character  of  true  organ- 
ized speculation. 

Eliminating  Uncommercial  Practices 

As  heretofore  explained,  the  introduction  of  the  spec- 
ulative element  into  a  market  and  the  organization  of  spec- 
ulation upon  an  exchange  are  the  best  guarantees  that 
can  be  had  at  the  present  time  against  monopoly  or  the 

1  Report  of  Governor  Hughes 's  Committee,  p.  14.    Cf.  infra,  p.  262. 


THE  ALTERNATIVE  239 

domination  of  a  clique.  Yet  the  speculative  markets  are 
by  no  means  clear  of  manipulation;  and  the  freedom  of  or- 
ganized speculation,  with  its  ready  responsiveness  to  every 
gust  or  eddy  of  price  movements  shown  in  the  great  num- 
ber of  minor  fluctuations,  gives  facility  for  rapid  manipu- 
lations for  small  turns.  But  the  machinery  of  an  exchange, 
with  its  discipline,  its  organization,  and  its  publicity, 
renders  it  possible  to  reform  practices  which  would  be 
irremediable  outside.  And  the  Hughes  Committee  was 
able  to  point  out  legislative  measures  and  changes  in  the 
rules  of  the  exchanges  which  would  accomplish  the  re- 
forms that  they  advocated. 

The  committee  favored  an  even  greater  degree  of  pub- 
licity than  that  which  now  exists.  The  books  and  accounts 
of  the  members  should  be  subjected  to  periodic  examina- 
tion and  inspection,  pursuant  to  rules  and  regulations  to 
be  prescribed  by  the  exchange.1 

The  filing  of  frequent  statements  of  the  financial  condi- 
tion of  companies  whose  securities  are  listed  on  the  ex- 
change is  recommended.2  But  it  was  thought  that  the 
attempted  verification  of  the  statements  of  fact  contained 
in  the  papers  filed  with  the  application  for  listing  would 
give  the  securities  a  standing  in  the  eyes  of  the  public 
which  would  not  in  all  cases  be  justified. 

It  is  sought  to  deprive  the  manipulator  of  the  fruits  of 
his  manipulations  by  providing  a  special  rule  against  corn- 
ers, whereby  the  governors  of  the  stock  exchange  shall  have 
power  to  decide  when  a  corner  exists  and  to  fix  a  settlement 
price,  so  as  to  relieve  innocent  persons  from  the  injury  or 
ruin  which  compliance  with  the  present  rules  would  in- 
volve.3 

Various  measures  are  suggested  looking  toward  the 
suppression  of  bucket  shops.  The  exchange  should  have 
greater  control  of  the  ticker  service;  for  it  is  on  the  con- 

1  Report  of  Governor  Hughes' s  Committee,  p.  8. 
2  Ibid.,  p.  9.  8  Ibid.,  p.  8. 


240        VALUE  OF  ORGANIZED  SPECULATION 

tinuous  quotations  that  the  bucket  shop  principally  de- 
pends. The  passage  of  a  law  is  recommended  providing 
that,  in  so  far  as  the  transmission  of  continuous  quotations 
is  concerned,  telegraph  companies  shall  not  be  deemed 
common  carriers,  or  be  compelled  against  their  wishes  to 
transmit  such  quotations  to  any  person,  and  that  if  a  tele- 
graph company  has  reasonable  ground  for  believing  it  is 
supplying  quotations  to  a  bucket  shop  it  shall  be  crimin- 
ally liable  equally  with  the  keeper  of  the  bucket  shop. 
Tickers  carrying  quotations  are  to  be  licensed  and  bear  a 
plate,  whereon  must  appear  the  name  of  the  corporation 
firm  or  individual  furnishing  the  service  or  installing  the 
ticker,  and  a  license  number.  Telegraph  companies  buy- 
ing or  transmitting  quotations  from  the  exchanges  shall 
be  required  to  publish  semi-annually  the  names  of  all  sub- 
scribers to  the  service  furnished,  and  the  number  and  loca- 
tion of  the  tickers,  in  a  newspaper  of  general  circulation 
published  in  the  city  or  town  in  which  such  tickers  are  in- 
stalled. Measures  should  also  be  taken  to  control  the  direct 
wire  service.1 

Bucket-shopping  within  the  exchange  should  also  be 
severely  dealt  with,  says  the  committee,  and  adequate 
penalties  provided  in  case  a  trade  be  not  actually  executed.2 
Specialists  and  others  should  not  be  allowed  to  buy  and  sell 
for  their  own  account  while  acting  as  brokers,3  and  brokers 
should  be  required  to  furnish  in  all  cases  the  names  of 
brokers  from  whom  shares  were  bought  and  to  whom 
they  were  sold.4  Clearing-house  sheets  which  record  the 
transactions  of  an  exchange,  such  as  it  was  the  custom  at 
the  New  York  Stock  Exchange  to  keep  on  file  for  only  a 
week,  should  be  preserved  at  least  six  years.5 

Strict  regard  for  the  property  of  a  client  which  comes 
into  the  hands  of  his  broker  should  at  all  times  be  insisted 
upon;  and  brokers  should  not  lend  securities  that  come  into 

1  Report  of  Governor  Hughes' 's  Committee,  p.  17.  2  Ibid.,  p.  9. 

8  Ibid.,  p.  10.  4  Ibid.,  p.  16.  B  Ibid.,  p.  10. 


THE  ALTERNATIVE  241 

their  hands  or  re-hypothecate  them  except  in  compliance 
with  the  wishes  of  the  owner  or  the  customs  of  the 
exchanges.  It  is  recommended  that  when  a  broker  sells 
securities  purchased  for  a  customer  who  has  paid  for  them 
in  whole  or  in  part,  except  upon  the  customer's  default,  or 
disposes  of  them  for  his  own  benefit,  he  shall  be  held  guilty 
of  larceny.1 

The  idea  of  the  broker  and  of  his  clerks  being  placed  in 
the  position  of  trustees  for  the  business  and  property  of 
clients  is  important  in  the  consideration  of  all  reforms. 
Many  brokers  at  present,  in  order  that  they  may  give  their 
undivided  attention  to  the  interests  of  their  clients,  are 
careful  to  pursue  the  policy  of  not  speculating  at  all  for 
their  own  account.  The  New  York  Stock  Exchange  has  a 
rule  forbidding  any  member  to  carry  an  account  for  a 
clerk  or  employee  of  any  other  member.  The  committee 
recommended  an  extension  of  this  rule  so  as  to  prevent 
dealing  for  the  account  of  any  clerk  or  subordinate  em- 
ployee of  any  bank,  trust  company,  insurance  company, 
or  other  moneyed  corporation  or  banker.2 

Another  important  recommendation  of  the  committee 
relates  to  the  unit  of  trading.  At  the  time  the  committee 
made  its  report,  the  rules  of  the  New  York  Stock  Exchange 
permitted  bids  and  offers  for  large  amounts  of  stock  all  or 
none.  A  trader,  for  instance,  with  the  intention  of  mani- 
pulating the  market  might  bid  for,  say  1000  shares  of  stock 
at,  say  110  all  or  none.  By  thus  bidding  for  a  large 
amount  there  would  be  comparatively  little  chance  of  any 
one  accepting  the  proposition;  and  a  trader  who  might 
wish  to  sell,  say  100  shares,  might  offer  it  at,  say  109,  with 
no  takers.  The  requirement  that  the  bidder  in  such  case 
take  all  the  shares  offered  at  the  lower  price  before  bidding 
for  the  larger  block  at  the  higher  price  would  tend  to 
prevent  matched  orders.3 

1  Report  of  Governor  Hughes' s  Committee,  p.  9. 
a  Ibid.  »  Ibid.,  p.  10. 


242        VALUE  OF  ORGANIZED  SPECULATION 

Eliminating  Amateurism 

It  is  not,  however,  by  directly  making  the  attempt  to 
eliminate  the  various  forms  of  tmcommmercial  practices 
upon  the  exchanges  that  the  most  fruitful  field  for  the  re- 
forming of  organized  speculation  is  to  be  found.  If  we  wish 
to  propose  as  an  alternative  a  reformed  system,  we  should 
go  to  the  root  of  the  evil  and  find  on  whom  it  is  that  the 
manipulator  must  prey.  The  evils  of  organized  specula- 
tion centre  about  the  vast  mass  of  amateur  speculators 
whose  operations  constitute  such  a  large  proportion  of  the 
trading;  while  the  reckless  manner  in  which  these  amateurs 
risk  their  money  supplies  the  temptation  which  causes  the 
market  leaders  to  resort  to  manipulation  and  the  other 
discreditable  tactics. 

Organized  speculation  suffers  from  amateurism  as  does 
no  other  trade  or  profession.  Among  doctors  and  lawyers, 
for  instance,  there  is  an  examination  and  a  test  of  fitness 
before  one  is  permitted  to  practice.  In  speculation  such  a 
test  is,  of  course,  impracticable,  because  there  is  as  yet  no 
generally  recognized  science  of  speculation,  and  no  trea- 
tises which  describe  in  detail  the  movements  of  the  market. 
Such  a  science  is  beginning  to  emerge  from  the  more  com- 
prehensive science  of  economics,  but  only  the  beginning 
has  been  made. 

It  was  with  a  view  to  excluding  the  unskilled  and  those 
who  do  not  possess  the  proper  equipment  of  capital  that 
the  German  law  of  1896  provided  for  the  registration  of 
speculators.  The  law  even  went  to  the  length  of  declar- 
ing that  contracts  made  for  future  delivery  upon  the 
German  exchanges  were  not  enforcible  at  law  unless  both 
parties  to  a  transaction  were  registered.  The  registry, 
however,  was  unpopular.  Persons  occupying  positions  of 
trust  and  others  whom  it  was  desirable  to  exclude  from  the 
speculative  markets  refused  to  register,  but  that  fact  did 
not  deter  them  from  the  speculating.  Brokers  were  readily 


THE  ALTERNATIVE  243 

found  who  would  execute  their  orders  upon  the  strength  of 
their  word  or  the  giving  of  security.  There  were  many 
cases  in  which  unregistered  traders  refused  to  pay  losses, 
but  the  results  hoped  for  from  this  provision  of  the  law 
were  not  realized.  Instead  of  discouraging  illegitimate 
speculation,  it  only  encouraged  fraud,  perjury,  and  evasion. 

Unless  we  can  discover  some  method  of  selecting  desirable 
speculators  for  license  and  excluding  those  who  are  undesir- 
able, the  licensing  system  must  prove  a  failure.  It  is  also 
necessary  always  to  keep  in  mind  the  fact  that,  if  we  go  too 
far  in  making  organized  speculation  difficult,  the  restrictive 
measures  will  have  much  the  same  effect  as  an  attempt 
to  abolish  entirely  the  speculative  markets.  The  former 
traders  will  seek  real  gambling,  unorganized  speculation, 
or  speculative  business  to  gratify  their  love  of  excitement. 
The  elemental  passions  in  human  nature  cannot  be  held 
back  forcibly.  All  that  can  be  done  is  to  afford  every  fac- 
ility for  the  play  of  the  better  forces. 

Another  method  of  eliminating  amateurism  is  by  dis- 
couraging the  small  transactions.  It  is,  indeed,  true  that 
most  of  those  who  lose  money  upon  the  exchanges  are  poor, 
or  speedily  become  so  after  they  have  speculated;  and  no 
doubt  the  small  speculator  is  usually  less  able  to  give  an 
intelligent  reason  for  his  operations  than  a  large  trader. 
Hence,  to  eliminate  these  small  speculators  would  seem  to 
afford  a  promising  opportunity  for  reform.  This  policy  is 
called  "killing  the  little  business"  and  consists  of  shutting 
off  private  wire  connections  in  small  cities  and  elsewhere, 
in  keeping  some  of  the  smaller  exchanges  from  getting  the 
quotations  of  the  larger  ones,  and  in  excluding  privilege  trad- 
ing on  the  theory  that  the  smaller  traders  would  thereby 
be  deterred  from  speculating. 

If  we  consider  only  the  present,  it  might  appear  that  this 
policy  would  lead  to  a  real  reform.  Doubtless  many  of  the 
perverted  uses  of  the  exchanges  would  be  done  away  with. 
But  to  one  who  believes  that  the  reformer  should  always 


244        VALUE  OF  ORGANIZED  SPECULATION 

keep  in  mind  the  great  services  in  the  world  of  commerce 
which  a  properly  conducted  system  of  organized  specula- 
tion may  perform,  it  would  not  seem  wise  thus  roughly  to 
push  aside  the  class  of  smaller  traders.  If  the  people  are  to 
be  really  educated  to  use  the  exchanges  for  their  proper 
purpose,  they  should  learn  that  any  speculator,  even 
though  he  may  be  poor,  should  have  a  chance  to  grow  up  in 
his  business  by  diligence  and  saving.  We  provide  education 
at  a  small  price  for  our  professional  men  in  the  hope  that 
thereby  talents  which  might  not  otherwise  be  developed 
may  be  availed  of.  Speculators  need  skill  more  than  any 
other  form  of  equipment.  If  a  speculator  have  real  talent 
for  his  selected  calling,  he  may  be  able,  even  though  he 
begin  in  a  small  way,  quickly  to  cut  an  important  figure  in 
the  market. 

By  inducing  the  speculator  to  use  caution  in  his  dealings 
and  thus,  if  possible,  preventing  him  from  exposing  his 
capital  to  the  mercy  of  any  gust  or  eddy  in  the  speculative 
markets,  we  have  a  method  of  reform  quite  different  from 
that  just  discussed  and  more  promising  of  favorable  results. 
Indeed,  there  is  a  way  in  which  the  speculator  can  almost 
be  compelled  to  exercise  caution  in  a  direction  in  which 
caution  is  greatly  to  be  desired.  Margin  transactions,  it  is 
true,  are  essential  to  exchange  trading  the  same  as  in  the 
case  of  any  other  business.  But  there  is  a  tendency  in  any 
business  for  the  equity  which  the  business  man  holds  over 
and  above  the  debts  that  he  owes,  or  in  other  words  his 
margin,  to  become  too  small.  This  is  especially  noticeable 
in  the  case  of  exchange  trading,  as  the  margins  in  that  busi- 
ness have  sometimes  almost  reached  the  vanishing  point 
or  disappeared  altogether.  But  by  the  action  of  the  rules  of 
the  exchange,  a  trader  may  be  required  to  adapt  the  size  of 
his  trades  to  the  size  of  his  margin  and  thus  be  compelled  to 
exercise  a  reasonable  degree  of  caution.  The  person  with 
small  capital  should  not  undertake  commercial  enterprises 
except  on  a  moderate  scale;  and  speculation  is  the  form  of 


THE  ALTERNATIVE  245 

business  in  which  the  danger  of  attempting  to  work  on  in- 
sufficient capital  is  greatest. 

The  reform  suggested  is  practicable  because  such  a  meas- 
ure would  have  the  support  of  brokers.  They  desire  large 
margins;  for,  if  the  client  does  not  furnish  good  security  in 
this  way,  his  account  is  likely  to  become  exhausted,  thus 
making  it  necessary  to  close  it,  with  possible  loss  to  them- 
selves. They  also  desire  it  because  a  client  who  speculates 
on  large  margins  has  a  greater  chance  of  success;  and,  in 
case  a  broker  had  a  number  of  such  customers,  he  would 
not  have  to  be  continually  seeking  a  new  clientele  to  take 
the  place  of  those  speculators  who  had  lost  all  in  previous 
deals.  Hence  brokers  would  look  on  such  a  requirement  as 
an  excellent  excuse  to  enable  them  to  insist  on  getting  that 
which  they  all  the  time  desired.  A  properly  qualified 
speculator  would  not  be  deterred  from  speculating  by  such 
a  rule  as  that  just  suggested.  His  chances  of  success  would 
merely  be  increased  by  his  being  compelled  to  use  more 
caution. 

In  pyramiding,  the  speculator  uses  his  accrued  profits  on 
a  deal  as  a  margin  for  further  deals,  and  such  a  pyramid,  to 
carry  the  figure  out  consistently,  rests  upon  its  apex.  It  is 
only  a  question  of  time  before  the  market  will  have  a  reac- 
tion, causing  the  broker  to  close  out  the  pyramid  of  deals  at 
a  loss.  A  pyramid  is  made  by  either  a  chronic  bull  or  a  bear, 
who  can  only  see  one  side  of  a  market  and  who  thus  serves 
to  negative  to  a  great  extent  the  services  which  organized 
speculation  undoubtedly  performs.  The  Hughes  Commit- 
tee recommended  very  properly  larger  margins  for  single 
trades  and  for  pyramids.1  Rules  of  the  exchanges  carrying 
this  recommendation  into  effect  would  constitute  one  of 
the  most  important  measures  that  could  be  adopted  in  the 
direction  of  eliminating  the  worst  features  of  amateurism 
from  the  exchanges. 

Looking  at  this  subdivision  of  the  subject  from  a  slightly 

1  Report  of  Governor  Hughes' 3  Committee,  p.  6. 


246       VALUE  OF  ORGANIZED  SPECULATION 

different  angle,  it  would  appear  that  the  reformer  should 
not  merely  refrain  from  discouraging  the  trading  in  small 
lots,  but  he  should  positively  encourage  such  trading.  The 
stock  exchange  is  the  principal  place  at  which  the  shares  of 
corporations  controlling  the  important  industries  of  the 
country  are  traded  in.  If  its  rules  and  customs  could  be  so 
altered  as  to  encourage  the  distribution  of  stocks  among  the 
people,  an  important  public  service  would  be  rendered. 
Surely  nothing  would  spread  prosperity  more  widely  than 
the  ownership  of  corporation  securities  by  the  people  gen- 
erally, so  that  dividends  and  interest  would  go  to  the  per- 
sons who  now  receive  only  wages. 

It  is  to  be  regretted  that  the  rules  and  customs  of  the 
stock  exchange  have  not  in  general  favored  this  wide  dis- 
tribution of  securities.  If  a  trader  wished  to  buy  a  share  of 
stock  on  time,  he  has  usually  had  offered  him,  not  the  in- 
stallment plan  which  encourages  small  payments  from 
earnings  with  a  view  to  ultimate  proprietorship,  but 
the  margin  plan,  which,  on  the  contrary,  encourages  reck- 
less borrowing  under  the  delusive  hope  of  quick  profits 
from  unsound  methods  of  speculation  and  investment.  The 
fact  that  margin  trading  was  usually  restricted  to  one  hun- 
dred share  lots  has  been  another  cause  for  over-trading; 
as  a  speculator,  in  order  to  buy  the  required  large  number 
of  shares,  was  obliged  to  reduce  the  proportionate  size  of  his 
margin.  Thus  the  very  evil  which  is  the  cause  of  great  loss 
to  speculators  has  been  fostered  rather  than  frowned  upon. 

It  is  true  that  any  one  may  buy  as  small  an  amount  as 
one  share  of  stock  if  he  pay  for  it  in  full ;  and  many  have 
availed  themselves  of  the  privilege.  As  a  result  there  are 
many  investors  in  the  stocks  of  our  great  corporations; 
and  there  are  not  lacking  financial  writers  who  have  com- 
piled statistics  of  the  size  of  holdings  and  have  discovered 
that  in  a  nation  of  nearly  a  hundred  millions  there  are  thou- 
sands of  small  investors  in  its  industries.  But,  in  compari- 
son with  the  professional  men  and  laborers  in  the  country, 


THE  ALTERNATIVE  247 

the  number  of  stockholders  is  small,  and  enormous  holdings 
still  exist  in  the  hands  of  a  few. 

The  manner  in  which  the  stock  exchange  could  help  in 
this  matter  would  be  by  giving  encouragement  to  its  mem- 
bers to  develop  that  department  of  their  business  which  is 
concerned  with  trading  in  what  are  called  "odd  lots"  or 
small  lots  of  stock.  In  order  to  provide  for  the  develop- 
ment of  this  kind  of  business,  the  excellent  suggestion  has 
been  made  that  the  brokers  would  naturally  seek  it  if  they 
were  fortified  by  the  rules  of  the  exchange  and  by  custom  in 
charging  what  the  service  is  worth.  At  present  there  is 
usually  no  difference  between  the  rate  of  commission 
charged  for  trading  in  large  and  small  lots.  Hence  a  broker 
may  buy  one  share  of  stock,  get  it  registered  in  the  name 
of  a  purchaser,  and  send  it  to  him  by  registered  mail,  requir- 
ing postage,  stationery,  book-keeping,  and  other  kinds  of 
clerical  labor  besides  expert  advice,  and  yet  receive  for  com- 
mission only  twelve  and  a  half  cents. 

As  heretofore  explained,  the  immense  amount  of  speculat- 
ive business  upon  an  exchange  pays  the  broker  so  well 
that  he  is  enabled  to  work  at  a  very  small  rate  of  commis- 
sion in  all  departments  of  his  business.  But  when  a  par- 
ticular department  is  conducted  at  a  loss,  there  is  little 
incentive  to  develop  that  department.  In  other  lines  of 
trade  small  parcels  of  goods  are  charged  for  at  a  higher  rate 
than  large  parcels.  Why  should  the  services  of  a  broker  be 
paid  for  on  a  different  principle?  If  the  broker  felt  at  lib- 
erty to  charge  what  the  service  is  worth  in  odd-lot  transac- 
tions, he  could  afford  to  push  the  sale  of  these  small  lots  of 
stock  by  advertising  and  solicitation,  and  thus  have  an 
important  influence  hi  distributing  the  stock  among  people 
of  moderate  means.  And  what  plan  could  be  better 
adapted  to  develop  the  class  of  small  investors  than  to 
utilize  the  self-interest  of  those  specially  skilled  in  selling 
stock? 

There  are  a  few  brokers  upon  the  stock  exchange  at  the 


248        VALUE  OF  ORGANIZED  SPECULATION 

present  time  who  advertise  that  they  make  a  specialty  of 
dealing  in  stocks  in  odd  lots  and  who  sell  them  on  the  in- 
stallment plan.  Considered  from  the  standpoint  of  the  wel- 
fare of  the  people,  the  installment  plan  is  injurious  in  cases 
where  it  encourages  luxurious  living  in  the  hope  of  putting 
off  the  day  of  payment.  But  where  it  induces  people  to 
save,  and  especially  where  it  diverts  capital  from  fraudu- 
lent schemes  to  useful  enterprises,  it  becomes  of  great 
utility. 

The  tendencies  of  all  exchange  markets  are  against 
monopoly.  But  the  usefulness  of  the  stock  exchange  could 
be  further  increased  if  it  cast  its  influence  in  the  direction  of 
making  innocuous  such  monopolies  as  do  exist  by  distribut- 
ing their  ownership,  or,  in  other  words,  by  making  every 
trust  a  people's  trust.  One  of  the  most  cruel  wrongs  in- 
flicted upon  working-people  and  the  poor  is  found  in  the 
fact  that  swindlers  are  allowed  to  foist  upon  them  stocks 
in  enterprises  of  the  most  fraudulent  character,  while,  be- 
cause of  the  customs  described  above,  they  are  kept  out  of 
touch  with  the  experts  who  should  be  their  natural  advis- 
ers. Our  men  of  light  and  leading  in  a  financial  way  have 
it  in  their  power,  through  the  machinery  provided  by  or- 
ganized speculation,  gradually  to  turn  the  people  from  the 
dishonest  schemes  whose  stocks  could  not  be  recognized 
upon  the  exchange  to  the  ownership  of  shares  in  the  corpor- 
ations which  produce  the  staples  and  finer  manufactures  of 
the  country. 

Speculation  (so  the  writer  holds)  is  a  practical  art, 
which,  like  other  arts,  is  best  undertaken  by  those  who  are 
adapted  to  it  and  specialize  in  it.  But  every  one  who  seeks 
interest  on  savings  must  invest  them  in  some  way,  and 
every  possible  method  for  bringing  the  citizenship  of  the 
country  in  touch  with  the  best  investments  should  be 
carefully  considered  by  the  reformer  and  the  philan- 
thropist. 

Besides  the  compulsion  of  such  rules  as  those  considered 


THE  ALTERNATIVE  249 

and  the  persuasion  of  speculators  to  see  their  own  best 
interests,  the  systematic  education  of  those  who  show  apti- 
tude in  the  principles  of  speculation  should  constitute  an 
important  part  of  the  reformative  measures.  It  is  only, 
indeed,  by  this  means  that  lasting  reforms  can  be  accom- 
plished. Speculation  should  be  cultivated  as  a  science  and 
as  an  art;  and  the  methods  of  its  study  and  the  manner 
in  which  the  knowledge  of  it  is  disseminated  may  well  en- 
gage the  attention  of  scientists  and  educators. 

It  is  the  same  with  speculation  as  with  any  art.  It  cannot 
be  fully  developed  by  a  system  of  mere  rules  and  prohibi- 
tions. Take  agriculture  as  an  example.  How  can  the  poorly 
cultivated  fields  of  the  farmer  be  best  brought  to  the  re- 
quired standard?  So  far  as  laws  and  restrictions  are  con- 
cerned, there  is  no  system  which  can  be  depended  upon  to 
furnish  a  guide  to  the  agriculturalist  in  tilling  the  soil. 
Some  favor  dry  farming.  Others  advise  irrigation.  There 
are  those  who  advise  a  favorite  specialty,  such  as  market 
gardening  or  fruit-growing  in  all  cases;  while  others  posi- 
tively insist  upon  mixed  husbandry  as  the  only  system. 
But  these  suggestions  merely  indicate  different  directions 
in  which  the  farmer  should  be  educated.  He  can  effect  but 
little  improvement  in  his  art  from  the  advice  and  rules  laid 
down  for  his  benefit.  Even  a  diligent  attempt  to  follow  a 
system  of  "don'ts"  will  not  make  an  intelligent  agricul- 
turalist. The  best  results  can  be  attained  only  when  the 
learner  has  been  brought  to  understand  the  underlying 
purpose  of  his  art  and  the  true  relation  of  its  different  parts 
and  subdivisions. 

Speculation  suffers  in  comparison  with  agriculture  in  that 
it  is  a  newer  science  and  the  art  of  it  is  not  so  well  devel- 
oped. But  it  is  gratifying  to  note  that,  especially  within 
the  last  decade,  speculation  has  received  increased  atten- 
tion from  students.  If  pursued  as  an  art  in  the  true  scien- 
tific spirit,  it  affords  opportunities  for  utilizing  the  most  dis- 
criminating insight  into  economics.  It  is  the  best  example 


250        VALUE  OF  ORGANIZED  SPECULATION 

of  a  business  in  which  the  knowledge  of  underlying  eco- 
nomic laws  can  be  applied  to  practical  affairs.  The  creation 
of  correct  public  sentiment  in  regard  to  the  principles  in- 
volved, in  short,  the  education  of  the  public  in  the  proper 
use  of  the  exchanges,  is  the  most  important  work  of  the 
Hughes  Committee. 

Summary  of  the  Chapter 

When  the  abolition  of  an  institution  is  contemplated,  the 
question,  What  is  to  be  put  in  its  place?  should  always  be 
considered;  or,  in  other  words,  what  is  the  alternative? 
The  critics  of  organized  speculation  habitually  shirk  this 
question;  hence  an  examination  of  it  becomes  all  the  more 
important. 

First,  the  proposed  laws  eliminating  short  selling  were 
considered;  but  it  was  shown  that  such  measures  would 
only  result  in  a  crippled  or  restricted  market  as  an  alter- 
native. 

The  question  of  monopoly  was  next  taken  up,  and  the 
importance  of  insurance,  especially  of  insurance  against 
fluctuations  in  prices,  dwelt  upon.  It  was  shown  that  to 
the  small  business  house  such  insurance  is  almost  indis- 
pensable, that  the  exchanges  furnish  the  place  at  which  the 
risks  of  price  changes  can  best  be  borne,  and  that  they  are 
borne  by  speculators  of  gambling  or  risk-taking  propensi- 
ties. The  alternative  to  this  system  of  risk-bearing  is  that 
of  transferring  the  risk  to  the  large  companies  or  trusts 
which  adopt  the  quite  different  method  of  guarding  against 
risks  by  controlling  the  processes  of  production  and  the 
making  of  prices.  Hence,  in  competition  with  small  busi- 
ness houses  that  are  not  allowed  to  use  the  exchanges,  the 
monopoly  is  easily  able  to  gam  the  mastery  and  so  increase 
its  monopolistic  power. 

The  result  of  the  freedom  afforded  for  the  interplay  of 
economic  forces  upon  an  exchange  is  a  balancing  of  inter- 
ests. Whether  all  the  interests  represented  be  good  or  bad, 


THE  ALTERNATIVE  251 

the  fact  that  they  are  given  free  rein  is  the  best  safeguard 
against  the  power  of  monopoly. 

The  question  was  next  considered  from  the  standpoint  of 
the  individual,  and  it  was  shown  that  the  most  likely  and 
acceptable  alternative  is  real  gambling.  But  in  undertak- 
ing purely  gambling  hazards  the  gambler  gratifies  his  risk- 
taking  propensities  to  no  useful  purpose,  whereas,  by  spec- 
ulating upon  the  exchanges,  even  considering  them  at  their 
worst,  he  would  be  helping  to  bear  the  necessary  risks  of 
fluctuating  values. 

Unorganized  speculation  was  next  considered  as  an  al- 
ternative, and  it  was  shown  that  the  demoralizing  effect 
upon  individual  fortunes  is  greater  in  the  case  of  unorgan- 
ized speculation  than  in  the  organized  kind.  In  short,  the 
organization  of  speculation  does  not,  all  things  consid- 
ered, increase  its  evil  effects  upon  the  individual  or  upon 
society.  Speculative  business,  too,  offers  an  unsatisfactory 
alternative,  as  it  has  many  of  the  evils  of  gambling  and  of 
unorganized  speculation. 

Considered  from  a  practical  standpoint,  however,  there 
is  no  acceptable  alternative.  Any  law  which  attempts  to 
abolish  organized  speculation  or  to  remove  essential  fea- 
tures will  be  evaded,  causing,  in  all  probability,  more  in- 
jury than  benefit  to  the  commercial  world. 

The  only  alternative  which  would  be  acceptable  to 
organized  speculation  as  it  exists  to-day  would  be  a  re- 
formed system  which  retained  the  essential  features,  but 
eliminated,  so  far  as  possible,  the  uncommercial  practices 
which  have  such  unwelcome  prominence  in  large  commer- 
cial exchanges.  Institutions  which  have  only  the  outward 
forms  of  exchanges  should  be  dissolved  or  else  made  into 
true  exchanges.  Uncommercial  practices  and  all  manipula- 
tion should  be  discouraged  or  prohibited;  and  amateurism, 
the  greatest  cause  of  the  evils  of  organized  speculation, 
should  be  eliminated,  even  at  the  expense  of  much  effort  on 
the  part  of  legislatures  and  of  the  exchanges  themselves. 


252        VALUE  OF  ORGANIZED  SPECULATION 

The  best  method  to  pursue  in  discouraging  the  illegiti- 
mate use  of  organized  speculation  is  to  encourage  its  legiti- 
mate use.  The  idea  should  be  instilled  into  the  minds  of 
traders  that  the  exchanges  are  places  for  the  transaction 
of  business,  not  for  gambling  or  any  form  of  robbery  or  ex- 
tortion. No  attempt  should  be  made  to  force  the  amateur 
speculator  or  person  of  risk-taking  propensities  to  avoid  all 
risks,  but  he  should  be  encouraged  to  take  those  which  are 
necessary  and  for  the  good  of  the  community,  and  so  to 
educate  himself  in  risk-taking  that  he  will  cease  to  be  an 
amateur.  If  the  adventuring  traders  are  led  to  substitute 
the  necessary  risks  of  commerce  for  their  reckless  gam- 
bling ventures,  there  will  remain  but  little  to  make  the 
service  of  the  exchanges  truly  ideal.  Most  of  the  other 
reforms  suggested  are  but  methods  of  accomplishing  this 
important  one.  In  short,  it  is  through  educating  the  peo- 
ple in  the  proper  use  of  organized  speculation  considered 
as  a  commercial  instrument  that  reforms  can  best  be  ac- 
complished. 

In  effecting  these  reforms  the  difficulties  of  securing  legis- 
lative action  could  be  avoided  if  the  better  element,  acting 
through  the  regularly  constituted  authority  of  the  ex- 
changes, were  to  pursue  a  consistent  policy  in  the  direction 
indicated.  The  measures  taken  should  not  proceed  to 
startling  lengths  at  first.  It  is  only  by  gradual  stages  that 
an  institution  which  has  been  perverted  can  be  brought  to 
its  true  and  beneficent  purpose.  Speculation  so  organized 
that  the  transactions  will  be  legitimate  and  perform  a  serv- 
ice offers  the  only  acceptable  alternative  to  the  system  of 
organized  speculation  as  it  exists  to-day.1 

1  Cf.  Postscript,  p.  262. 


CONCLUSION 

SUMMING  UP  —  IMPORTANT  FACTS  TO  BE  EMPHASIZED 
-  THE  FAULTS  OF   ORGANIZED   SPECULATION  AS  IT 
EXISTS   TO-DAY  —  ITS  VALUE  IN  ITS  IDEAL  FORM 

IN  closing,  the  first  important  fact  to  be  emphasized  is 
that  there  are  grave  evils  connected  with  organized  specu- 
lation as  it  exists  to-day.  This  is  admitted  on  all  hands, 
even  among  the  representatives  of  the  exchanges;  but  the 
problem  is  not  to  be  solved  by  recrimination  or  by  exag- 
gerated statements  and  abusive  epithets.  The  members, 
brokers,  traders,  and  speculators  upon  an  exchange  are  not 
demons,  and  their  sentiments  are  as  altruistic  as  any.  But 
when  they  hear  their  business  denounced  in  the  most  un- 
sparing terms  by  those  who  know  nothing  of  its  nature  and 
who  take  no  pains  to  become  acquainted  with  the  facts, 
the  insult  is  quite  naturally  resented.  Their  anger  may  be 
pardoned;  but,  as  a  matter  of  policy,  it  would  perhaps  be 
better  to  admit  even  more  than  they  do.  They  protest  too 
much.  It  should  be  fully  and  frankly  conceded  that  the 
great  mass  of  transactions  upon  the  exchanges  are  merely 
the  action  of  unskilled  adventurers  who  know  nothing  of 
the  trend  of  commerce  and  who  are  seeking,  in  the  most 
childish  manner,  to  make  money  without  work  either  men- 
tal or  physical. 

The  case  for  organized  speculation  is  so  strong  that  it  is 
not  necessary  to  resort  to  any  form  of  special  pleading  or 
to  minimize  any  argument  that  an  opponent  may  legiti- 
mately make.  For  if  we  look  beyond  the  present  repulsive 
aspect  of  the  speculative  exchanges  and  disregard  the 
noisy  shouting  crowd  of  greedy  money-grabbers,  the  whole 
process  may  appear  in  a  different  light.  That  which  is  re- 
pulsive is  seen  as  merely  the  outward  form  of  an  import- 


254        VALUE  OF  ORGANIZED  SPECULATION 

ant  factor  in  commerce,  as  yet  undeveloped;  and  the  ex- 
change idea  is  seen  as  the  crowning  one  in  a  world  of  pos- 
sible economic  harmonies. 

The  true  place  of  business  among  the  factors  of  social 
progress  is  hidden  from  us  in  the  same  sense  in  which  it 
may  be  said  that  the  underlying  purpose  of  the  phenomena 
that  a  biologist  observes  cannot  be  explained  or  exempli- 
fied. In  economics,  the  discussion  centres  about  the  ques- 
tion, who  is  to  act  in  industry,  and  whether  enterprises 
should  be  undertaken  by  the  individual,  by  associations  of 
individuals,  or  by  the  people  as  a  whole.  The  world  has 
not  grown  old  enough,  nor  has  a  sufficient  fund  of  experi- 
ence been  collected  so  that  any  observer  is  qualified  to 
make  dogmatic  or  sweeping  assertions  on  this  question. 
But  from  the  mass  of  what  has  been  written  and  said,  the 
tentative  conclusion  appears  to  issue  that  action  should 
be  neither  entirely  social  nor  entirely  individual  in  its 
character.  The  spirit  of  friendly,  peaceful  rivalry  and  of 
self-help  by  the  individual  can  never  be  dispensed  with. 
Neither  is  it  possible  for  any  man,  either  now  or  at  any 
time,  to  live  for  himself  alone.  The  great  problem  of  eco- 
nomic science,  which  in  one  form  or  another  is  always  the 
perplexing  one,  is  to  devise  a  plan  whereby  the  world  may 
get  the  full  benefit  of  work  from  those  who  have  the  inde- 
pendence which  can  only  come  from  the  long  exercise  of 
the  right  of  private  initiative  and  at  the  same  time  the  co- 
operation which  constitutes  the  indispensable  service  of 
socializing  labor. 

There  are  some  departments  of  industrial  activity  in 
which  the  work  is  best  undertaken  by  the  community  act- 
ing as  a  whole,  and  in  which,  indeed,  it  would  be  impossible 
for  the  individuals  as  separate  units  to  make  progress  worth 
while.  At  the  same  time  there  are  other  departments  in 
which  it  is  necessary  that  the  individuals  act  separately. 
As  for  the  great  mass  of  economic  activities,  they  fall  with- 
out either  of  these  classes;  and  it  requires  impartial  study 


CONCLUSION  255 

of  the  conditions  prevailing  in  each  industry  at  particular 
times  and  places  before  the  manner  of  conducting  them  will 
be  apparent.  The  crass  blundering  efforts  of  those  who 
would  constitute  some  authority  to  dictate  to  individuals 
in  regard  to  all  matters  are  only  equaled  by  the  fanatical 
utterances  of  those  who  can  see  no  benefit  in  collective 
action  and  who  would  destroy  the  organization  which  is 
naturally  being  effected  in  business. 

Individuals  acting  for  themselves  with  an  enlightened 
self-interest  competing  side  by  side  with  voluntary  associa- 
tions, and  each  of  these  forms  of  industrial  activity  utiliz- 
ing the  factors  of  economic  strength  which  naturally  be- 
long to  it,  is  the  solution  of  the  question  of  a  great  part  of 
the  injustice  that  prevails  to-day. 

It  would  be  without  the  scope  of  this  essay  to  undertake 
to  describe  the  manner  in  which  these  associations  and  in- 
dividuals would  be  related  to  one  another,  or  to  indicate 
the  possible  combinations  that  might  be  formed;  and  such 
a  task  would  be  impossible  of  accomplishment,  as  no  one 
living  could  understand  the  conditions  that  will  exist  thou- 
sands of  years  from  now.  There  are  indications,  however, 
that  two  important  existing  agencies,  both  of  which  are  at 
present  imperfect,  will  play  an  important  part.  The  com- 
mercial corporations  as  at  present  managed  are  the  object 
of  execration;  and  much  of  it  is  just.  But  it  should  be  re- 
membered that  they  are  voluntary  associations,  that  any 
one  may  enter  them  by  purchasing  their  stock,  and  that  they 
are  sufficiently  elastic  so  that  persons  of  different  degrees 
of  ability  with  faculties  fitted  for  performing  different  tasks, 
some  with  large  and  some  with  small  amounts  of  capital, 
may  unite,  if  they  so  wish,  all  these  forms  of  production; 
and,  selecting  a  particular  field,  operate  for  the  good,  not 
only  of  the  members  of  the  corporation,  but,  in  a  larger 
sense,  for  the  benefit  of  the  industrial  world  as  a  whole. 
The  corporation  is  adapted  to  a  field  in  which  a  rather 
compact  form  of  organization  is  required,  and  is  naturally 


256        VALUE  OF  ORGANIZED  SPECULATION 

sought  by  those  who  are  willing  to  bind  themselves  to  act 
with  others  as  a  united  body.  It  permits,  however,  of  a  di- 
versity of  talents;  and,  even  with  all  the  present  obstacles, 
it  performs  some  tasks  better  than  can  be  done  by  any 
other  agency. 

The  other  institution,  which  is  imperfect  at  present  but 
,  promises  so  much  for  the  future,  is  the  commercial  ex- 
change. The  principle  of  insurance  is  one  of  the  factors 
mentioned  in  this  essay  which  enables  the  individual  with 
his  fortune  yet  to  make  to  compete  on  equal  terms  with 
associations  of  great  wealth  and  power.  Life  insurance 
and  fire  insurance  are  beneficent  in  their  work;  but  some- 
thing that  will  perform  the  function  of  insurance  against 
fluctuations  in  prices  is  even  more  important.  By  its  influ- 
ence upon  the  commercial  world  as  discussed  above,  and 
especially  by  the  facilities  for  hedging  which  it  furnishes, 
"the  exchange  does  give  this  insurance  against  fluctuations 
in  price. 

Considered  from  the  point  of  view  of  the  interests  of  the 
community,  it  is  better  that  the  individual  seek  insurance 
or  indemnity  rather  than  bind  himself  with  others  to  act  as 
a  unit.  For  any  kind  of  an  association,  even  that  of  a  cor- 
poration in  its  ideal  form  as  shown  above,  has  some  con- 
tracting influence  upon  individual  initiative;  whereas,  he 
who  has  insured  himself  or  hedged  in  some  way  against 
fluctuations  in  prices  and  business  may  act  with  the  con- 
fidence that  he  has  behind  him  a  vast  force  of  collective 
power,  and  at  the  same  time  he  may  have  freedom  to  di- 
rect his  business  in  his  own  wTay  which  is  usually  the  best 
way. 

Such  a  loose  and  elastic  form  of  organization  as  that 
suggested  by  the  commercial  exchange  is  best  fitted  to 
harmonize  with  activities  at  a  future  time.  At  present  the 
people  are  not  ready  for  it,  which  accounts  for  the  fact  that 
they  misuse  it,  pervert  it,  and  then  bitterly  criticize  it.  It 
exists  principally  as  an  indication  of  the  future.  All  that  is 


CONCLUSION  257 

needed  is  time  for  its  proper  development  by  utilizing  the 
agencies  that  even  at  present  have  made  their  appearance, 
although  in  an  imperfect  form. 

The  Value  of  Organized  Speculation  as  shown  by  Present 
Tendencies 

The  subject  under  discussion  has  awakened  so  much  bit- 
ter controversy,  and  the  lines  are  so  sharply  drawn  between 
those  who  believe  that  organized  speculation  is  a  valuable 
factor  in  the  commercial  system  and  those  who  regard  it 
with  unmixed  horror,  that  it  is  almost  impossible  to  get 
any  of  the  disputants  to  take  a  middle  ground,  or  even  to 
admit  the  force  of  any  of  the  arguments  that  opponents 
may  make.  The  above  statement  of  ideals,  therefore,  will 
not  be  cordially  received  by  those  who  can  see  no  good  in 
organized  speculation.  To  such  persons  probably  no  form 
of  argument  will  appeal  which  to  any  extent  favors  the  ex- 
changes. But  it  will  be  interesting,  and  it  may  possibly 
remove  some  prejudice,  if  it  be  shown  that  organized  spec- 
ulation is  at  present  tending  in  the  direction  of  the  ideals 
suggested. 

It  is  not,  however,  in  legislation,  or  even  in  action  on  the 
part  of  officers  of  the  exchanges,  that  the  moving  force 
which  shows  itself  in  present  tendencies  is  to  be  found.  As 
above  suggested,  the  only  reform  that  goes  to  the  root  of 
the  matter  and  that  can  appreciably  affect  the  character  of 
the  organized  markets  is  that  of  education  as  to  their  pro- 
per use.  Compulsion  may  help  to  lop  off  some  of  the  evil 
results  of  unwise  practices,  but  it  cannot  take  the  place  of 
enlightenment  in  developing  an  institution. 

First  to  be  considered  is  the  discipline  of  actual  experi- 
ence and  the  knowledge  gained  through  personal  observa- 
tion. By  hard  knocks  and  the  examples  of  those  who  have 
speculated  unwisely  to  be  seen  on  every  hand,  a  fund  of 
practical  wisdom  has  been  unconsciously  formulated  which 
already  has  some  influence  in  restraining  speculative  ex- 


258        VALUE  OF  ORGANIZED  SPECULATION 

cesses.  Considering  the  long  time  that  it  has  taken  to  learn 
the  practical  arts,  as,  for  instance,  agriculture,  it  is  indeed 
remarkable  that  any  progress  should  have  been  made  in 
the  newly  discovered  art  of  speculation. 

As  for  academic  training,  it  must  be  admitted  that  in- 
struction in  commerce  is  not  generally  provided  for  in  the 
endowed  professional  and  technical  schools.  But  it  may 
be  mentioned,  on  the  other  hand,  that  in  the  last  two  de- 
cades there  has  been  a  great  improvement  in  the  writings 
upon  all  that  relates  to  the  speculative  exchanges.  This  is 
seen  not  only  in  the  books  put  out,  but  also  in  the  periodi- 
cal press;  and  there  is  much  more  interest  taken  in  all  pub- 
lications bearing  upon  the  subject.  Thus  the  instruction 
is  being  heeded  and  is  having  a  profound  influence  in  shap- 
ing present  tendencies. 

As  regards  the  technical  financial  publications,  they  show 
continued  progress,  and  at  present  are  excellently  adapted 
to  the  needs  of  the  traders.  More  important,  however,  in 
influencing  the  public  outside  the  exchanges  are  the  pop- 
ular magazines,  reviews,  and  periodicals  which  of  recent 
years  have  established  financial  departments;  and  it  is  grat- 
ifying to  find  that,  even  in  the  case  of  a  periodical  intended 
primarily  to  entertain  its  readers,  there  is  often  seen  a  seri- 
ous discussion  of  some  of  the  practical  points  of  speculation 
and  investment.  In  the  daily  press,  also,  and  even  in  what 
is  called  the  "yellow  press,"  the  financial  departments  give 
better  instructions  and  the  matter  is  better  arranged  than 
formerly. 

This  continued  progress  being  made  in  popular  educa- 
tion in  regard  to  finance  is  much  of  it  to  be  attributed  to 
the  interest  aroused  in  the  subject  by  the  speculative  ex- 
changes themselves.  The  facilities  afforded  do  not  involve 
that  degree  of  application  on  the  part  of  the  learner  which 
is  required  in  the  professional  schools  by  the  intending 
lawyer,  doctor,  or  other  aspirant  for  any  of  the  learned  pro- 
fessions. It  should  be  recollected,  however,  that  the  calling 


CONCLUSION  259 

of  the  speculator,  even  at  the  present  time,  has  scarcely 
been  recognized  as  a  legitimate  one;  and  it  is  not  to  be  ex- 
pected that  the  development  of  a  few  decades  should  equal 
that  of  centuries. 

If  it  be  said  that  there  are  many  charlatans  assuming  to 
give  instruction  in  speculative  matters,  the  reply  might  be 
made  that,  when  any  trade  or  profession  is  in  the  formative 
period,  it  is  not  likely  to  be  directed  by  conservative  think- 
ers. The  fact  that  much  of  the  teaching  is  popular,  and 
written  in  a  style  calculated  to  create  an  interest  in  finan- 
cial matters  and  to  hold  the  attention  of  the  reader,  does  not 
detract  from  the  value  of  it;  on  the  contrary,  the  instruc- 
tion is  thereby  made  all  the  more  effective,  while  disagree- 
ment in  regard  to  any  of  the  precepts  put  forward  should 
not  deter  us  from  recognizing  the  value  of  the  instruction 
as  a  whole. 

Of  all  the  tendencies  observable  in  the  field  of  economics, 
the  progress  being  made  in  the  education  of  the  people  in 
the  proper  use  of  the  speculative  exchanges  gives  the  most 
encouragement.  To  him  who  believes  that  commerce  is 
something  more  than  a  mere  temporary  expedient  or  ne- 
cessary evil,  to  him  who  believes  that  the  best  way  to 
establish  prices  is  to  give  freedom  to  trade  and  an  oppor- 
tunity for  specialists  to  exert  an  influence,  —  to  such  a 
person  the  fact  that  the  people  are  actually  taking  pains  to 
learn  about  the  only  free  markets  that  exist  is  cause  for 
the  greatest  satisfaction.  What  surely  could  give  us  more 
hope  for  widely  distributed  prosperity  among  the  people 
than  the  disposition  manifested  to  turn  aside  from  the  cir- 
culars and  advertisements  of  fraudulent  investments  that 
are  such  a  frequent  cause  of  poverty  and  ruin,  and  to 
substitute  therefor  well-considered  articles  in  which  the 
securities  of  legitimate  productive  enterprises  are  exempli- 
fied and  compared? 

Let  us  consider  first  the  commodity  exchanges.  The 
adventuring  speculative  element  in  them  is  much  less  im- 


260        VALUE  OF  ORGANIZED  SPECULATION 

portantthan  formerly;  and  the  decline  in  what  is  called 
"public  interest"  in  the  market  is  the  subject  of  bitter 
complaint  by  those  who  seek  to  profit  by  the  recklessness 
and  folly  of  traders.  It  is  said  by  them  that  speculation  hi 
commodities  is  "played  out,"  and  that  it  does  not  attain 
the  importance  in  the  market  that  it  did  formerly.  Indeed, 
with  the  decline  of  the  plunger,  it  is  found  that  the  pro- 
perly equipped  speculator  as  well  as  the  dealer  in  cash  grain 
or  other  commodities  becomes  more  prominent. 

This  effect  has  appeared,  not  merely  as  a  result  of  com- 
pulsion from  rules  of  exchanges  or  from  laws  that  discour- 
age speculation,  but  because  the  people  are  beginning  to 
see  the  folly  of  prevailing  speculative  methods.  When  the 
price  of  wheat,  for  instance,  has  been  worked  up  above  its 
legitimate  value  and  the  cliques  are  seeking  to  dispose  of 
the  property  at  the  high  price  which  has  been  artificially 
produced,  they  find  difficulty  in  getting  buyers,  and  are 
obliged  to  hold  for  a  long  period  of  time  before  they  can 
get  a  chance  to  unload;  and  there  are  even  those  among 
the  rank  and  file  of  speculators  who  actually  have  the  tem- 
erity to  sell  short  at  such  a  time  and  patiently  await  the 
inevitable  break  which  must  follow.  The  rapidity  with 
which  the  turns  can  be  made  upon  the  commodity  ex- 
changes is  much  less  than  formerly. 

As  for  the  stock  exchange,  the  wild  orgy  of  reckless  spec- 
ulation which  marked  the  opening  decade  of  the  present 
century  will  perhaps  lead  some  persons  to  the  belief  that 
the  evils  which  come  from  speculation  are  growing  greater 
instead  of  less.  The  excitement  in  the  stock  market  may 
be  explained  by  certain  special  factors  which  appeared  at 
that  time  and  had  a  great  unsettling  influence  in  all  com- 
mercial channels.  There  was  at  the  time  mentioned  (what- 
ever may  have  been  the  cause)  a  great  rise  in  the  price  of 
commodities,  which  resulted  in  feverish  activity  in  busi- 
ness and  finance.  Besides,  it  should  be  called  to  mind  that 
a  transformation  was,  and  still  is,  going  on  whereby  the 


CONCLUSION  261 

organization  of  the  industries  of  the  country  is  being 
changed  from  the  form  of  the  small  business  house,  copart- 
nership, or  corporation  to  that  of  the  large  corporation  or 
trust.  This  transformation  (whether  for  good  or  ill)  and 
the  great  attention  attracted  by  the  rapid  rise  hi  wealth 
and  power  of  those  who  promoted  it,  coupled  with  the  rise 
in  commodity  prices  mentioned,  could  not  but  result  in 
recklessness  in  the  dealings  in  shares  of  the  different  enter- 
prises. The  tendencies  mentioned,  however,  are  not  likely 
to  come  in  conjunction  again;  and  for  a  decade  or  two  we 
shall  probably  experience  a  reaction  from  recent  prevail- 
ing conditions. 

Furthermore,  in  the  case  of  securities  as  well  as  in  that 
of  commodities,  the  experience  of  the  people  and  the  in- 
struction they  are  receiving  are  beginning  to  teach  them 
the  folly  of  the  unskilled  adventuring  methods  of  specu- 
lating. Thus,  during  the  panic  of  1907,  it  was  noticed  that 
there  were  a  number  of  speculators  and  small  investors 
who  came  into  Wall  Street  and  purchased  outright  many 
of  the  stocks  which  were  being  slaughtered,  thereby  adding 
greatly  to  the  number  of  those  whose  influence  and  opera- 
tions stopped  the  decline.  The  people  are  beginning  to  see 
the  folly  of  investing  in  the  expensively  advertised  securi- 
ties of  enterprises  not  organized  upon  business  principles, 
and  are  turning  towards  the  securities  sold  in  Wall  Street, 
which  have  been  tested  as  to  value  hi  the  school  of  ex- 
perience by  the  great  financiers  of  the  country,  and  are 
rapidly  passing  to  the  people  to  be  held  for  speculation  or 
investment. 

It  would  appear,  therefore,  from  the  above  considera- 
tions that  organized  speculation,  whether  we  consider  the 
commodity  exchanges  or  those  that  deal  in  securities,  is 
showing  its  value  in  that  it  is  beginning  to  be  discussed  by 
serious  minded  thinkers;  and  it  is  deriving  additional  im- 
portance from  the  fact  that  the  people  are  commencing  to 
seek  conservative  instruction  in  it  and  are  actually  begin- 


262        VALUE  OF  ORGANIZED  SPECULATION 

ning  to  understand  it,  so  that,  to  some  extent  at  least,  they 
are  utilizing  its  best  features  and  are  dropping  the  features 
that  militate  against  its  usefulness. 

If  the  people  are  to  have  the  right  to  buy  and  sell  at  such 
prices  as  they  may  agree  upon,  and  if  commodities  are  to 
be  distributed  by  the  best  commercial  system,  then  organ- 
ized speculation  must  occupy  a  place  at  the  head  of  af- 
fairs. It  directs  commerce  by  means  of  actual  transactions 
made  by  specialists.  It  tends  to  steady  prices  and  prevents 
many  of  the  eccentric  price  fluctuations  seen  outside  the 
exchanges.  It  gives  mobility  where  mobility  is  most  to  be 
desired.  It  is  the  enemy  of  monopoly  in  most  of  its  forms. 
It  provides  facilities  whereby  business  men  of  small  means 
are  enabled  in  many  cases  to  compete  on  an  equality  with 
the  large  corporations  or  trusts;  while  in  different  ways, 
such  as  the  opportunities  afforded  for  hedging,  it  serves  to 
facilitate  the  flow  of  commodities  in  their  exchange  and 
distribution. 

The  value  of  organized  speculation  for  the  future  is  indi- 
cated by  its  suggestion  of  an  ideal  towards  which  the  com- 
mercial world  is  tending.  For  the  present  its  value  is  seen 
in  the  fact  that  it  is  approaching  more  and  more  nearly  to 
its  ideal  form;  and  already  the  outlines  of  a  commercial 
system  can  be  discerned  in  which  organized  speculation  will 
occupy  the  first  place  as  the  head  and  director  of  all  eco- 
nomic factors. 

Postscript  —  Present  Legislative  Tendencies 

A  word  as  to  the  application  of  these  general  conclusions 
to  events  taking  place  as  this  book  goes  through  the  press 
seems  desirable. 

The  Hughes  Committee  has  been  especially  referred  to, 
in  the  discussion  of  proposed  reforms,  because  its  inquiries 
were  conducted  without  political  or  other  sensationalism, 
because  it  gave  all  sides  a  hearing,  and  because  its  report 
was  a  well-considered  one  and  its  recommendations  conserv- 


CONCLUSION  263 

ative.  At  the  time  of  writing,  and  particularly  at  the  time 
of  going  to  press,  there  are  different  investigations  attract- 
ing public  attention,  some  of  which,  it  is  to  be  regretted, 
are  not  marked  by  that  patient  consideration  demanded  by 
the  importance  and  seriousness  of  the  subject. 

The  measures  at  present  advocated  are  along  familiar 
lines  such  as  abolishing  or  curtailing  short  selling  or  of 
restricting  exchange  trading  by  a  tax,  almost  if  not  quite, 
prohibitive.  It  is  believed  that  the  arguments  herein 
brought  forward  are  sufficient  to  show  the  folly  of  doing 
anything  to  curtail  the  free  action  of  the  exchanges  in  the 
exercise  of  their  natural  functions.  Another  measure  ad- 
vocated is  compelling  the  New  York  Stock  Exchange  to 
incorporate.  But,  inasmuch  as  abuses  are  just  as  pre- 
valent upon  exchanges  which  are  already  incorporated, 
it  would  seem  that  incorporation  is  a  poor  reliance  for 
those  who  desire  reforms  which  go  to  the  root  of  the 
matter. 

Some  of  the  proposed  measures  would  strengthen  our 
laws  against  fraud  such  as  matched  orders  and  other  frauds 
that  are  especially  prominent  upon  the  exchanges.  No  one 
should  oppose  laws  which  tend  to  suppress  fraud;  but  it 
should  be  remembered  that  legislation  on  this  subject  is 
always  difficult  of  enforcement,  because  it  is  impossible  to 
penetrate  the  inner  councils  of  the  cliques  or  manipulators 
who  find  it  so  easy  to  evade  the  law. 

Furthermore  the  fact  should  be  kept  in  mind  that  the 
speculative  exchanges  are  by  no  means  the  only  places 
where  fraud  and  monopoly  can  be  found.  Outside  the 
exchanges  cliques  of  business  men  can  act  much  more  effec- 
tively in  deceiving  the  public  and  in  giving  a  false  value  to 
securities  or  commodities.  No  one  will  pretend  that  cliques 
do  not  have  their  influence  in  organized  speculation;  but 
the  fact  is  apparent  that  they  are  everywhere  restricted 
by  the  publicity  and  freedom  of  exchange  organization. 

There  are  occasional  prosecutions  under  our  present  laws. 


264        VALUE ^OF  ORGANIZED  SPECULATION 

The  Supreme  Court  has  recently  decided  that  running  a 
corner  in  a  commodity  which  is  the  subject  of  interstate 
commerce  is  criminal;  and  a  prominent  operator  has  been 
fined  for  cornering  the  cotton  market.  The  recent  action 
of  the  United  States  Government  against  the  Chicago 
Board  of  Trade  under  the  Sherman  law  is  a  case  in  point. 
It  is  said  that  the  best  way  in  which  to  secure  the  repeal  of 
a  bad  law  is  strictly  to  enforce  it.  For  that  reason  the 
attempts  to  enforce  the  Sherman  law  are  justifiable.  The 
prosecutions  under  that  law  have  proved  that  it  is  con- 
stitutional and  that  there  may  be  decisions  sustaining  the 
contention  of  the  government  and  that  the  trusts  can  be 
dissolved  into  their  constituent  companies.  Yet,  despite 
their  outward  compliance,  the  same  combinations  exist 
substantially  as  before,  the  same  people  are  in  charge,  and 
essentially  the  same  methods  are  pursued. 

In  contrast  to  the  abortive  action  of  the  Sherman  law,  we 
have  the  system  of  organized  speculation  which  gives  oppor- 
tunity for  anyone  to  make  his  influence  felt  and  for  the 
free  working  of  all  rivalries  between  cliques,  factions  and 
individuals  in  the  commercial  world.  Upon  the  Chicago 
Board  of  Trade,  for  instance,  there  is  the  freest  market 
during  the  session;  and  it  was  thought  by  the  officers  and 
members  of  the  board,  or  at  least  by  a  majority  of  them, 
that  the  prices  at  which  grain  is  bought  between  the  ses- 
sions should  conform  to  the  quotations  made  in  the  regular 
market.  Hence  bids  for  grain,  based  upon  the  results  of 
each  day's  trading  are  sent  out,  which  prices  are  uniform, 
but  which  prevail  only  until  the  opening  of  the  board  at 
its  next  daily  session.  The  question  of  whether  such  a 
system  of  fixing  prices  is  a  violation  of  the  Sherman  law  is 
one  for  the  courts  to  decide.  The  humor  of  the  situation  is 
brought  to  mind  when  we  realize  the  fact  that  a  combina- 
tion which,  at  its  worst,  exists  only  part  of  the  day  is  at- 
tacked, while  at  all  times  there  exist  outside  the  exchanges 
combinations  which  suppress  competition,  and  some  are 


CONCLUSION  265 

found  even  in  those  lines  of  trade  in  which  the  trusts  are 
supposed  to  have  been  "  broken  up.*' 

If  grain  were  not  traded  in  according  to  the  system  of 
organized  speculation  the  combination  would  cover  the 
hours  of  active  business  of  the  day  as  well  as  the  quieter 
portion,  and,  at  no  time,  would  there  be  a  free  market.  If 
it  were  not  for  the  publicity  which  goes  with  everything 
connected  with  the  board  a  combination  could  readily  be 
arranged  which  could  be  managed  quietly  and  which  would 
not  attract  sufficient  attention  to  warrant  a  prosecution. 
It  is  the  free  market  upon  our  commercial  exchanges  that 
destroys  combinations,  not  the  attempts  to  enforce  the 
Sherman  law  which  only  result  in  giving  new  forms  to  the 
trusts  without  destroying  their  power  or  influence. 

The  recommendations  of  the  Pujo  Committee,  of  Gover- 
nor Sulzer  and  others  will  doubtless  result  in  action  by  some 
of  our  legislative  bodies.  Probably  also  the  Sherman  law 
will  be  revised  or  superseded  by  more  effective  legislation. 
It  is  not  likely,  however,  that  any  radical  changes  will  be 
made  in  our  laws  touching  organized  speculation,  notwith- 
standing the  high-sounding  language  of  some  of  those  who 
discuss  the  subject.  The  right  of  the  people  to  form  associa- 
tions for  the  purpose  of  facilitating  trade  is  a  fundamental 
one;  and  it  is  scarcely  believable  that  in  this  country  it  will 
ever  be  infringed.  At  present  the  legislative  proposals  and 
indiscriminate  criticism  occupy  public  attention  almost 
exclusively.  But  all  this  activity  and  interest  taken  in  the 
speculative  markets  cannot  but  result  in  a  juster  estimate 
of  the  value  of  organized  speculation.  The  exchanges  can- 
not be  destroyed.  They  can  only  be  reformed  by  the  leav- 
ening power  of  popular  education. 


APPENDIX 


APPENDIX 


TABLE  I 
YEARLY  RANGE  OF  WHEAT  PRICES  AT  CHICAGO 

(Report  of  the  Chicago  Board  of  Trade,  1910) 


Year 

Months  Lowest 
Prices  were 
reached 

Low 

High 

Difference 

Months  Highest 
Prices  were 
reached 

1865 

December 

$.85 

$155 

$.70 

January 

1866 

February 

.78 

2.03 

1.25 

November 

1867 

August 

1.55 

2.85 

1.30 

May 

1868 

November 

2.20 

1.15$ 

July 

1869 

December 

2.47 

1.70$ 

August 

1870 

April 

1.31$ 

.58| 

July 

1871 

1872 
1873 

August 
November 
September 

1.01 

.89 

1.32 
1.61 
1.46 

.32$ 
.60 
.57 

Feb.,  Apl.,  Sept. 
August 
July 

1874 

October 

.81$ 

1.28 

.46$ 

April 

1875 

February 

.83* 

.47i 

August 

1876 

July 

.83 

1.26f 

.43| 

December 

1877 

August 

1.01$ 

1.76$ 

.75 

May 

1878 

October 

.77 

1.14 

.37 

April 

1879 

January 

.81| 

1.33$ 

.51 

December 

1880 

August 

.86$ 

1.32 

.45 

January 

1881 

January 

.951 

1.43J 

.47 

October 

1882 
1883 

December 
October 

.91} 
.90 

1.40 
1.13$ 

.48 

April  and  May 
June 

1884 

December 

.69 

.96^ 

.26, 

February 

1885 

March 

.73j 

.91? 

.18; 

April     ' 

1886 

October 

.69 

!84| 

.15 

January 

1887 

August 

.66 

.94f 

.28] 

June 

1888 

April 

.71 

2.00 

1.28 

September 

1889 
1890 

June 
February 

.75 

.74 

1.08| 
1.08! 

.33- 
.34 

February 
August 

1891 

July 

.84' 

1.16 

.31 

April 

1892 

October 

.69 

.91| 

.22$ 

February 

1893 

July 

.54 

.85 

.31 

April 

1894 
1895 
1896 

July 
January 
August 

.50 
•48| 
.53 

•63J 
.81* 

QJ.3 

.«r±ff 

.133 
.32f 
.4lf 

April 
May 
November 

1897 

April 

.64$ 

1.06 

•41J 

December 

1898 

October 

.62 

1.85 

1.23 

May 

1899 

December 

.64 

.79$ 

.15$ 

MaJ 

1900 

January 

.87$ 

.26 

June 

1901 

July 

!63 

.79$ 

.ttj 

December 

1902 

October 

.67, 

.95 

.27, 

September 

1903 

March 

.70 

.93 

.22: 

September 

1904 

January 

.81 

1.22 

.40^ 

Sept.,  Oct.,  Dec. 

1905 
1906 
1907 

August 
Aug.  and  Sept. 
January 

.77 

iff 

1.24 

.94| 
1.22 

.46; 

.*51 

February 
May 
October 

1908 

July 

.84$ 

1.11 

.26$ 

May 

1909 

August 

.991 

1.60 

•60| 

June 

1910 

November 

.89$ 

1.29$ 

.40 

July. 

270 


APPENDIX 


TABLE   II 
YEARLY  RANGE  OF  CORN  PRICES  AT  CHICAGO 

(Report  of  the  Chicago  Board  of  Trade,  1910) 


Tear 

Months  Lowest 
Prices  were 
reached 

Low 

High 

Difference 

Months  Highest 
Prices  were 
reached 

1865 

December 

$  .38 

8  .88 

$  .50 

Jan.  and  Feb. 

1866 

February 

.33| 

1.00 

.66J 

November 

1867 

March 

.56S 

1.12 

.551 

October 

1868 

December 

.52 

.50* 

August 

1869 

January 

.44 

.'97* 

.53* 

August 

1870 

December 

.45 

.94? 

.49* 

May 

1871 
1872 

December 
October 

.39* 
.291 

.56* 

.17 

March  and  May 
May 

1873 

June 

.27 

!54J 

.27J 

December 

1874 
1875 

1876 

January 
December 
February 

.49 
.45* 

.38 

.86 

3? 

.37 
.31 

.10] 

September 
May  and  July 
May 

1877 

March 

.37j 

.58 

.20; 

April 

1878 

December 

.29 

.43| 

.13 

March 

1879 

January 

.29 

.49 

.19 

October 

1880 

April 

.31, 

.12- 

November 

1881 

February 

.35 

.40, 

October 

1882 

December 

.49 

.32 

July 

1883 

October 

.46 

.70 

.24 

January 

1884 

December 

.87 

.52* 

September 

1885 

January 

.49 

.141 

April  and  May 

1886 

October 

.45 

.11* 

July 

1887 

February 

.33 

.51$ 

.18$ 

December 

1888 

December 

.33, 

.60 

.26* 

May 

1889 

December 

.60 

.30| 

November 

1890 

February 

'.27: 

.54i 

.27 

November 

1891 

December 

.39, 

.80 

•40f 

November 

1892 

January 

.37, 

1.00 

.62* 

May 

1893 

December 

.34 

AA7 

.101 

May 

1894 

February 

.33i 

.59* 

.25J 

August 

1895 

December 

.24, 

.54} 

.29* 

May 

1896 

September 

.19; 

.30| 

.11$ 

April 

1897 

Jan.  and  Feb. 

•21; 

.32* 

.io| 

August 

1898 

January 

.26 

.38 

.12 

December 

1899 

December 

.30 

.084 

January 

1900 

January 

•  30* 

.19 

November 

1901 

January 

.36 

.30| 

December 

1902 

December 

.431 

.88 

.44J 

July 

1903 

December 

.41 

.53 

.12 

July  and  August 

1904 

January 

.42$ 

.58$ 

.15 

November 

1905 

Jan.  and  Dec. 

.42 

.644 

.22 

May 

1906 

Feb.  and  March 

.39 

•54f 

.15 

June 

1907 

January 

•66  A 

.26 

October 

1908 

February 

.56* 

.82 

.25, 

May  and  Sept. 

1909 

January 

.58| 

.77 

.18 

June 

1910 

December 

.68 

.22- 

January 

APPENDIX 


271 


TABLE  III 

YEARLY  EANGE  OF  COTTON  PRICES  AT  NEW 
YORK  (CENTS  PER  POUND) 

(Shepperson,  Cotton  Facto,  1910) 


Year 

Highest 

Lowest 

Difference 

Year 

Highest 

Lowest 

Difference 

1830 

13 

8 

5 

1870 

25.75 

15 

10.75 

1831 

11 

7 

4 

1871 

21.25 

14.75 

6.50 

1832 

12 

7 

5 

1872 

27.38 

18.63 

8.75 

1833 

17 

9 

8 

1873 

21.38 

13.63 

7.75 

1834 

16 

10 

6 

1874 

18.88 

14.75 

4.13 

1835 

20 

15 

5 

1875 

17.13 

13.06 

4.07 

1836 

20 

12 

8 

1876 

13.38 

10.88 

2.50 

1837 

17 

7 

10 

1877 

13.31 

10.81 

2.50 

1838 

12 

9 

3 

1878 

12.19 

8.81 

3.38 

1839 

16 

11 

5 

1879 

13.75 

9.25 

4.50 

1840 

10 

8 

2 

1880 

13.25 

10.94 

2.31 

1841 

11 

9 

2 

1881 

13 

10.44 

2.56 

1842 

9 

7 

2 

1882 

13.06 

10.25 

2.81 

1843 

8 

5 

3 

1883 

11.13 

10.00 

1.13 

1844 

9 

5 

4 

1884 

11.94 

9.75 

2.19 

1845 

8.38 

5 

3.38 

1885 

11.50 

9.19 

2.31 

1846 

10 

6 

4 

1886 

9.56 

8.81 

.75 

1847 

12 

7 

5 

1887 

11.44 

9.44 

2.00 

1848 

8 

5 

3 

1888 

11.38 

9.63 

1.75 

1849 

11 

6 

5 

1889 

11.50 

9.75 

1.75 

1850 

14 

11 

3 

1890 

12.75 

9.19 

3.56 

1851 

14 

8 

6 

1891 

9.50 

7.75 

1.75 

1852 

10 

8 

2 

1892 

10.00 

6.69 

3.31 

1853 

11 

10 

1 

1893 

9.94 

7.25 

2.69 

1854 

10 

8 

2 

1894 

8.31 

5.56 

2.75 

1855 

12 

8 

4 

1895 

9.38 

5.56 

3.82 

1856 

13 

9 

4 

1896 

8.88 

7.06 

1.82 

1857 

15.88 

9 

6.88 

1897 

8.25 

5.81 

2.44 

1858 

13.50 

8.88 

4.62 

1898 

6.56 

5.31 

1.25 

1859 

12.75 

10.63 

2.12 

1899 

7.81 

5.88 

1.93 

1860 

11.63 

10 

1.63 

1900 

11.00 

7.56 

3.44 

1861 

38 

11.50 

2.65 

1901 

12.00 

7.81 

4.19 

1862 

69.50 

20 

49.50 

1902 

9.88 

8.38 

1.50 

1863 

93 

51 

42.00 

1903 

13.70 

8.85 

4.85 

1864 

1.90 

72 

118.00 

1904 

16.65 

6.85 

9.80 

1865 

1.20 

35 

85.00 

1905 

12.60 

7.00 

5.60 

1866 

52 

32 

20.00 

1906 

12.25 

9.60 

2.65 

1867 

36 

15.50 

20.50 

1907 

13.55 

10.60 

2.90 

1868 

33 

16 

17.00 

1908 

12.25 

9.09 

3.16 

1869 

36 

25 

10.00 

1909 

16.10 

9.25 

6.85 

272 


APPENDIX 


TABLE  IV 


MEAN  MONTHLY    PRICE  CONTRACT  WHEAT    (CASH) 
AT  CHICAGO,   1901-1910  (CENTS  PER  BUSHEL) 

(Based  upon  Reports  of  the  Chicago  Board  of  Trade  and  Bartels  &  Co.,  Book  of 
Statittical  Information) 


Months 

1901 

1902 

1903 

1904 

1905 

1906 

1907 

1908 

1909 

1910 

Average 

Jan. 

73.9 

77.3 

75.0 

87.4 

118.2 

85.6 

73.3 

96.8 

105.7 

118.9 

91.2 

Feb. 

73.4 

74.7 

77.1 

98.0 

118.8 

83.1 

79.9 

94.6 

115.8 

119.4 

93.5 

March 

74.8 

72.9 

73.1 

95.6 

114.9 

80.0 

79.5 

96.6 

121.9 

119.0 

92.8 

April 

72.2 

73.4 

75.3 

93.9 

103.1 

84.5 

80.5 

94.4 

131.9 

113.8 

92.3 

May 

72.6 

74.3 

77.7 

96.9 

100.4 

87.5 

92.5 

104.8 

140.3 

108.6 

95.6 

June 

71.4 

73.5 

80.1 

99.0 

107.0 

85.4 

96.0 

94.6 

144.5 

105.9 

95.7 

July 

67.4 

75.3 

79.5 

103.3 

103.3 

78.8 

97.8 

88.3 

123.1 

114.0 

93.1 

Aug. 

71.8 

72.1 

83.8 

107.0 

96.4 

73.5 

93.4 

92.8 

117.6 

112.3 

92.1 

Sept. 

69.6 

82.5 

83.8 

113.8 

86.9 

74.1 

101.8 

100.7 

107.8 

106.3 

92.7 

Oct. 

69.1 

71.5 

82.4 

115.9 

87.5 

72.4 

106.8 

102.6 

112.3 

102.8 

92.3 

Nov. 

71.9 

73.6 

81.0 

114.9 

87.6 

72.9 

92.8 

104.6 

112.1 

99.3 

91.1 

Dec. 

76.3 

74.8 

82.4 

116.6 

86.3 

73.8 

102.2 

103.1 

117.1 

100.0 

93.3 

TABLE  V 

MEAN    MONTHLY    PRICE    NO.    2    CORN     (CASH)    AT 
CHICAGO,  1901-1910  (CENTS  PER  BUSHEL) 

(Based  upon  Reports  of  the  Chicago  Board  of  Trade  and  Bartels  &  Co.,  Book  of 
Statistical  Information) 


Months 

1901 

1902 

1903 

1904 

1905 

1906 

1907 

1908 

1909 

1910 

Average 

Jan. 

36.9 

60.5 

45.9 

45.1 

42.6 

42.0 

41.6 

58.5 

59.5 

65.3 

49.8 

Feb. 

38.6 

58.9 

43.8 

50.3 

44.1 

40.6 

43.6 

58.0 

63.3 

64.8 

50.6 

March 

41.5 

58.6 

43.5 

52.8 

47.0 

41.5 

44.0 

62.3 

65.8 

62.5 

51.9 

April 

44.5 

60.6 

43.5 

51.7 

47.8 

45.8 

47.5 

66.5 

69.5 

58.8 

53.6 

May 

50.6 

61.9 

45.0 

48.6 

56.3 

48.8 

52.8 

74.9 

74.1 

59.5 

57.2 

June 

42.7 

66.3 

49.6 

48.8 

54.3 

52.4 

53.1 

70.8 

74.3 

59.0 

57.1 

July 

50.9 

72.0 

51.0 

48.6 

56.4 

51.4 

53.6 

74.3 

71.1 

63.0 

59.2 

Aug. 

56.6 

57.0 

51.8 

53.5 

55.0 

49.8 

57.8 

78.8 

68.3 

63.1 

59.2 

Sept. 

56.9 

69.8 

49.0 

52.9 

52.9 

48.5 

62.1 

80.0 

66.4 

55.4 

58.4 

Oct. 

56.3 

58.3 

44.8 

53.6 

52.3 

46.0 

61.1 

72.5 

60.5 

50.0 

55.5 

Nov. 

60.5 

55.0 

43.1 

54.1 

48.5 

45.6 

58.0 

64.3 

62.9 

49.8 

54.2 

Dec. 

65.0 

50.5 

42.4 

46.3 

46.1 

43.0 

59.5 

59.5 

64.3 

47.8 

52.4 

APPENDIX 
TABLE  VI 


273 


AVERAGE  MONTHLY  PRICE  MIDDLING  UPLAND 
COTTON  AT  NEW  YORK  1900-1909  (CENTS  PER 
POUND) 

(Based  upon  Shepperson,  Cotton  Facts) 


Months 

1900 

1901 

1902 

1903 

1904 

1905 

1906 

1907 

1908 

1909 

Average 

Jan. 

7.77 

10.06 

8.30 

8.95 

14.13 

7.21 

11.95 

10.84 

11.80 

9.64 

10.07 

Feb. 

8.63 

9.64 

8.62 

9.49 

14.94 

7.75 

11.16 

11.03 

11.55 

9.86 

10.27 

March 

9.66 

8.69 

9.02 

10.08 

15.44 

8.01 

11.30 

11.20 

11.01 

9.76 

10.42 

April 

9.81 

8.34 

9.39 

10.45 

14.40 

7.90 

11.74 

11.13 

10.19 

10.50 

10.39 

May 

9.55 

8.17 

9.52 

11.36 

13.41 

8.37 

11.81 

12.17 

10.89 

11.29 

10.65 

June 

9.22 

8.53 

9.33 

12.44 

11.54 

9.06 

11.03 

13.10 

11.70 

11.56 

10.75 

July 

10.08 

8.50 

9.27 

12.81 

10.85 

11.11 

10.90 

13.13 

11.10 

12.64 

11.04 

Aug. 

9.84 

8.21 

8.96 

12.75 

10.93 

10.94 

10.30 

13.36 

10.27 

12.78 

10.83 

Sept. 

10.53 

8.39 

8.94 

11.84 

11.09 

10.84 

9.76 

12.54 

9.38 

13.04 

10.64 

Oct. 

10.09 

8.44 

8.80 

9.85 

10.36 

10.35 

10.99 

11.54 

9.20 

13.90 

10.35 

Nov. 

9.90 

7.95 

8.49 

11.18 

9.91 

11.49 

10.80 

11.08 

9.40 

14.79 

10.50 

Dec. 

10.19 

8.48 

8.65 

13.01 

7.69 

12.15 

10.65 

11.96 

9.23 

15.30 

10.73 

TABLE  VII 

MEAN  MONTHLY  PRICE  CONTRACT  WHEAT  (CASH) 
AT  CHICAGO  BY  YEARS  ENDING  JUNE  30  (CENTS 
PER  BUSHEL) 

(Based  upon  Reports  of  the  Chicago  Board  of  Trade  and  Bartels  &  Co..  Book  of 
Statistical  Information) 


Years 

Yearly 

ending 
June  30 

July 

Aug. 

Sept. 

Oct. 

Nov. 

Dec. 

Jan. 

Feb. 

Mch. 

Apr. 

May 

June 

Aver- 
age 

1893 

78.0 

77.1 

73.1 

72.0 

71.4 

71.0 

75.1 

73.9 

76.0 

79.3 

72.3 

65.1 

73.7 

1894 

60.3 

59.6 

66.2 

63.4 

60.9 

61.8 

61.4 

57.5 

57.6 

60.1 

56.1 

57.0 

60.1 

1895 

54.4 

53.9 

52.7 

51.4 

53.7 

54.9 

51.9 

50.8 

53.6 

58.7 

71.1 

75.0 

5G.8 

1896 

66.3 

63.9 

58.7 

59.6 

57.0 

56.8 

62.3 

66.6 

65.4 

66.1 

62.4 

60.3 

62.1 

1897 

58.3 

58.1 

62.5 

73.4 

82.7 

83.9 

77.0 

74.5 

73.5 

72.0 

72.4 

70.0 

71.5 

1898 

73.5 

88.0 

92.5 

90.0 

92.3 

96.0 

99.6 

101.5 

103.4 

112.2 

151.0 

97.5 

99.8 

1899 

76.9 

70.3 

65.4 

66.1 

67.0 

66.4 

71.3 

72.1 

70.3 

73.3 

73.9 

75.3 

70.7 

1900 

72.0 

71.8 

72.3 

71.6 

68.3 

66.8 

64.3 

65.7 

65.5 

66.3 

65.6 

76.7 

68.9 

1901 

77.8 

74.0 

75.9 

74.4 

71.9 

71.9 

73.9 

73.4 

74.8 

72.2 

72.6 

71.4 

73.7 

1902 

67.4 

71.8 

69.6 

69.1 

71.9 

76.3 

77.3 

74.7 

72.9 

73.4 

74.3 

73.5 

72.7 

1903 

75.3 

72.1 

82.5 

71.5 

73.6 

74.8 

75.0 

77.1 

73.1 

75.3 

77.7 

80.1 

75.7 

1904 

79.5 

83.8 

83.8 

82.3 

81.0 

82.4 

87.4 

98.0 

95.6 

93.9 

96.9 

99.0 

88.6 

1905 

103.2 

107.0 

113.8 

115.9 

114.9 

113.9 

118.3 

118.8 

114.9 

103.1 

100.4 

107.0 

111.0 

1906 

103.2 

96.4 

86.9 

87.5 

87.6 

86.3 

85.6 

83.1 

80.0 

84.5 

87.5 

85.4 

87.8 

1907 

78.8 

73.5 

74.1 

72.4 

72.9 

73.8 

73.3 

79.9 

79.5 

80.5 

92.5 

96.0 

78.9 

1908 

97.8 

93.4 

101.8 

106.8 

92.8 

102.2 

96.8 

94.6 

100.0 

98.0 

104.8 

100.6 

99.1 

1909 

101.8 

106.9 

102.2 

102.6 

104.6 

107.7 

105.7 

115.8 

121.9 

131.9 

140.3 

144.5 

115.5 

1910 

123.1 

117.6 

107.8 

112.3 

112.1 

117.1 

118.9 

119.4 

119.0 

113.8 

108.6 

105.9 

114.6 

274 


APPENDIX 
TABLE  VIII 


VISIBLE  SUPPLY  OF  WHEAT  IN  MILLIONS  OF 
BUSHELS    BY  YEARS  ENDING  JUNE  30 

(Based  upon  Reports  of  the  Chicago  Board  of  Trade  and  Bartels  &  Co.,  Book  of 
Statistical  Information) 


Years 
ending 
June  30 

July 

Aug. 

Sept. 

Oct. 

Nov. 

Dec. 

Jan. 

Feb. 

Mch. 

Apr. 

May 

June 

Aver- 
age 

1893 

24.3 

23.9 

36.3 

47.9 

61.7 

72.6 

81.8 

81.5 

79.1 

77.7 

75.0 

71.1 

61.1 

1894 

62.3 

59.3 

56.9 

60.5 

69.3 

78.1 

79.9 

79.9 

75.6 

71.5 

66.6 

59.4 

68.3 

1895 

54.7 

57.1 

66.9 

71.4 

80.0 

85.2 

87.9 

83.4 

78.8 

74.3 

62.2 

52.2 

71.2 

1896 

44.6 

38.5 

35.4 

40.8 

52.9 

63.9 

69.8 

66.7 

64.1 

60.3 

55.5 

50.3 

53.6 

1897 

47.2 

46.8 

45.6 

50.1 

58.7 

56.3 

54.7 

49.6 

43.8 

38.6 

34.4 

26.9 

46.1 

1898 

17.6 

17,8 

14.8 

21.1 

26.9 

34.8 

38.8 

36.6 

34.1 

30.2 

23.3 

23.7 

26.6 

1899 

14.7 

9.1 

7.1 

11.3 

15.5 

24.1 

26.9 

28.6 

29.9 

29.9 

28.1 

26.2 

20.9 

1900 

33.6 

36.0 

34.8 

42.1 

49.6 

55.8 

58.3 

54.4 

54.1 

54.2 

52.5 

44.7 

47.5 

1901 

46.4 

47.6 

50.3 

55.4 

60.0 

62.2 

61.2 

59.8 

57.2 

54.7 

46.7 

36.9 

53.2 

1902 

30.8 

30.4 

27.8 

35.3 

41.2 

52.4 

58.9 

57.9 

54.1 

49.6 

38.3 

28.6 

42.1 

1903 

19.8 

21.9 

20.9 

25.6 

32.2 

45.1 

49.7 

48.4 

47.8 

41.9 

33.5 

24.5 

34.3 

1904 

15.9 

13.4 

13.2 

19.5 

22.2 

30.1 

38.2 

39.8 

35.6 

31.7 

30.4 

21.6 

25.9 

1905 

14.1 

13.1 

12.8 

17.6 

26.5 

36.9 

40.6 

39.4 

36.5 

32.3 

28.5 

20.0 

26.5 

1906 

14.3 

13.4 

12.1 

17.9 

28.3 

36.9 

45.3 

48.5 

47.3 

46.5 

38.4 

30.8 

31.6 

1907 

25.9 

29.9 

30.1 

33.4 

37.9 

41.6 

45.8 

44.9 

44.9 

47.2 

51.9 

49.7 

40.3 

1908 

46.5 

48.3 

49.5 

43.8 

43.7 

43.5 

48.5 

46.7 

42.9 

38.1 

30.3 

22.8 

42.1 

1909 

15.4 

16.2 

16.3 

29.9 

48.1 

48.9 

51.8 

44.9 

38.2 

36.1 

29.6 

19.8 

32.9 

1910 

9.8 

7.6 

9.2 

19.4 

27.0 

31.1 

27.7 

26.5 

25.8 

29.0 

26.2 

20.1 

21.6 

TABLE  IX 

MEAN  MONTHLY  PRICE  NO.  2  CORN  (CASH)  BY  YEARS 
ENDING  JUNE  30  (CENTS  PER  BUSHEL) 

(Based  upon  Reports  of  the  Chicago  Board  of  Trade  and  Bartels  &  Co.,  Book  of 
Statistical  Information) 


Tears 

Yearly 

ending 

July 

Aug. 

Sept. 

Oct. 

Nov. 

Dec. 

Jan. 

Feb. 

Mch. 

Apr. 

May 

June 

Aver- 

June  30 

age 

1893 

49.6 

51.8 

46.2 

42.4 

41.8 

41.4 

42.6 

42.0 

40.8 

40.8 

42.0 

39.6 

43.4 

1894 

38.7 

38.2 

39.9 

39.0 

37.2 

35.4 

34.9 

34.7 

35.8 

37.9 

37.6 

39.9 

37.4 

1895 

43.5 

53.1 

53.0 

50.9 

50.0 

46.1 

430 

42.1 

44.4 

46.9 

51.6 

50.0 

47.9 

1896 

44.6 

39.7 

33.4 

30.0 

27.9 

25.8 

26.9 

28.4 

28.6 

29.6 

28.5 

27.4 

30.9 

1897 

25.9 

22.8 

20.9 

23.1 

24.1 

23.1 

22.6 

22.5 

23.8 

24.2 

24.3 

24.4 

23.5 

1898 

26.4 

29.4 

29.6 

26.5 

26.7 

26.3 

27.1 

28.9 

28.9 

32.1 

34.7 

32.4 

29.2 

1899 

33.6 

31.8 

30.3 

30.8 

33.1 

35.6 

36.7 

35.3 

34.6 

34.8 

33.4 

34.4 

33.7 

1900 

32.9 

31.8 

33.1 

32.0 

32.0 

30.8 

31.1 

32.9 

35.8 

39.6 

38.3 

40.4 

34.2 

1901 

41.6 

39.3 

41.1 

39.1 

42.3 

37.9 

36.9 

38.6 

41.5 

44.5 

50.5 

42.7 

41.3 

1902 

50.9 

56.6 

56.9 

56.3 

60.5 

65.0 

60.5 

58.9 

58.6 

60.6 

61.9 

66.3 

59.5 

1903 

72.0 

57.0 

59.7 

58.3 

55.0 

50.5 

45.9 

43.8 

43.5 

43.5 

45.0 

49.6 

51.9 

1904 

51.0 

51.7 

49.0 

44.8 

43.1 

42.4 

45.1 

50.3 

52.8 

51.7 

48.6 

48.8 

48.2 

1905 

48.6 

53.5 

52.9 

53.6 

54.1 

46.3 

42.6 

44.1 

47.0 

47.8 

56.3 

54.3 

50.0 

1906 

56.4 

55.0 

52.8 

52.3 

48.5 

46.1 

42.0 

40.6 

41.5 

45.8 

48.8 

52.4 

48.5 

1907 

51.4 

49.8 

48.5 

46.0 

45.6 

43.0 

41.6 

43.6 

44.0 

47.5 

52.8 

53.1 

47.2 

1908 

53.6 

57.8 

62.1 

61.  1 

58.0 

59.5 

58.5 

58.0 

62.3 

66.5 

74.9 

70.8 

61.9 

1909 

74.3 

78.8 

80.0 

72.5 

64.3 

59.5 

59.5 

63.3 

65.8 

69.5 

74.1 

74.3 

69.4 

1910 

71.1 

68.3 

66.4 

60.5 

62.9 

64.3 

65.3 

64.8 

62.5 

58.8 

59.5 

59.0 

63.6 

APPENDIX 
TABLE  X 


275 


VISIBLE  SUPPLY  OF  CORN  IN  MILLIONS  OF  BUSHELS 
BY  YEARS  ENDING  JUNE  30 

(Based  upon  Reports  of  the  Chicago  Board  of  Trade  and  Bartels  &  Co.,  Book  of 
Statistical  Information) 


Tears 
ending 

July 

Aug. 

Sept. 

Oct. 

Nov. 

Dec. 

Jan. 

Feb. 

Men. 

Apr. 

May 

June 

Aver- 

June 30 

age 

1893 

7.8 

7.0 

8.5 

10.9 

13.3 

10.7 

11.8 

12.5 

15.6 

15.3 

11.5 

8.2 

11.1 

1894 

8.1 

8.0 

5.5 

8.1 

9.2 

7.1 

9.5 

15.4 

19.1 

18.5 

13.1 

7.5 

10.8 

1895 

6.4 

3.9 

3.1 

4.3 

2.7 

4.9 

10.7 

12.7 

13.7 

13.4 

9.4 

10.8 

8.0 

1896 

9.1 

4.7 

5.4 

5.5 

4.9 

5.5 

5.8 

11.9 

13.0 

16.9 

11.3 

8.9 

8.6 

1897 

9.1 

10.8 

13.9 

13.9 

19.3 

17.4 

19.9 

21.9 

26.4 

25.3 

16.9 

12.5 

17.2 

1898 

15.9 

15.7 

31.2 

37.0 

45.9 

40.9 

38.4 

40.6 

40.9 

42.6 

27.0 

20.1 

33.1 

1899 

22.6 

17.6 

16.9 

21.4 

24.8 

20.4 

19.1 

27.1 

31.8 

32.7 

25.8 

13.3 

22.8 

1900 

13.9 

11.6 

6.7 

12.5 

13.7 

11.7 

11.6 

14.6 

19.7 

21.6 

21.9 

12.4 

14.3 

1901 

11.0 

12.3 

5.3 

7.5 

7.9 

9.4 

10.4 

14.8 

19.8 

22.3 

18.7 

16.4 

12.9 

1902 

15.2 

12.6 

12.7 

13.5 

12.9 

11.2 

11.7 

11.6 

10.3 

8.8 

6.2 

4.2 

10.9 

1903 

5.7 

7.3 

3.1 

3.1 

2.6 

2.9 

6.6 

8.3 

10.2 

9.8 

6.5 

4.9 

5.9 

1904 

7.2 

6.9 

5.8 

9.1 

7.3 

5.9 

5.8 

7.2 

8.8 

9.7 

7.8 

3.7 

7.1 

1905 

6.3 

5.8 

3.9 

5.9 

3.0 

3.2 

9.6 

11.7 

8.5 

8.8 

9.9 

4.6 

6.8 

1906 

3.6 

5.3 

4.6 

5.8 

3.5 

6.4 

12.8 

14.9 

16.2 

11.4 

3.9 

3.4 

7.7 

1907 

6.1 

4.3 

2.3 

4.2 

3.8 

2.9 

5.8 

7.3 

11.1 

11.9 

8.1 

5.6 

6.1 

1908 

8.7 

7.6 

3.9 

3.8 

3.4 

2.5 

4.5 

6.5 

8.8 

5.9 

5.0 

4.8 

5.5 

1909 

3.3 

2.1 

1.9 

3.5 

1.2 

2.7 

7.2 

6.5 

6.3 

6.9 

3.6 

2.8 

4.0 

1910 

3.3 

2.7 

1.9 

3.4 

2.7 

4.6 

8.5 

9.8 

14.4 

13.8 

10.6 

5.5 

6.8 

TABLE  XI 

AVERAGE  MONTHLY  PRICE  MIDDLING  UPLANDS  COT- 
TON IN  NEW  YORK  BY  YEARS  ENDING  AUGUST  31 
(CENTS  PER  POUND) 

(Based  upon  Sheppereon,  Cotton  Facts) 


Tears 
ending 
Aug.  31 

Sept. 

Oct. 

Nov. 

Dec. 

Jan. 

Feb. 

Mch. 

Apr. 

May 

June 

July 

Aug. 

Aver- 
age 

1899 

5.61 

5.42 

5.40 

5.78 

6.11 

6.50 

6.44 

6.19 

6.23 

6.19 

6.17 

6.22 

6.02 

1900 

6.57 

7.31 

7.62 

7.66 

7.77 

8.63 

9.66 

9.81 

9.55 

9.22 

10.08 

9.84 

8.65 

1901 

10.53 

10.09 

9.90 

10.19 

10.06 

9.64 

8.69 

8.34 

8.17 

8.53 

8.50 

8.21 

9.24 

1902 

8.39 

8.44 

7.95 

8.48 

8.30 

8.62 

9.02 

9.39 

9.52 

9.33 

9.27 

8.% 

8.81 

1903 

8.94 

8.80 

8.49 

8.65 

8.95 

9.49 

10.08 

10.45 

11.36 

12.44 

12.81 

12.75 

10.27 

1904 

11.84 

9.85 

11.18 

13.01 

14.13 

14.94 

15.44 

14.40 

13.41 

11.54 

10.85 

10.93 

12.63 

1905 

11.09 

10.36 

9.91 

7.69 

7.21 

7.75 

8.01 

7.90 

8.37 

9.06 

11.11 

10.94 

9.12 

1906 

10.84 

10.35 

11.49 

12.15 

11.95 

11.16 

11.30 

11.74 

11.81 

11.03 

10.90 

10.30 

11.25 

1907 

9.76 

10.99 

10.80 

10.65 

10.84 

11.03 

11.20 

11.13 

12.17 

13.10 

13.13 

13.36 

11.51 

1908 

12.54 

11.54 

11.08 

11.96 

11.80 

11.55 

11.01 

10.19 

10.89 

11.70 

11.10 

10.27 

11.30 

1909 

9.38 

9.20 

9.40 

9.23 

9.64 

9.86 

9.76 

10.50 

11.29 

11.56 

12.64 

12.78 

10.44 

1910 

13.04 

13.90 

14.79 

15.30 

14.85 

14.80 

15.04 

15.06 

15.32 

15.19 

15.59 

16.66 

14.96 

276 


APPENDIX 
TABLE  XII 


VISIBLE  SUPPLY  OF  AMERICAN  COTTON  IN  MILLIONS 
OF  BALES  YEAR  ENDING  AUGUST  31 

(Based  upon  Shepperson,  Cotton  Fact*) 


Tears, 
ending 

Sept. 

Oct. 

Nov. 

Dec. 

Jan. 

Feb. 

Men. 

Apr. 

May 

June 

July 

Aug. 

Aver- 

Aug. 31 

age 

1899 

1.37 

2.35 

3.60 

4.40 

4.82 

4.55 

4.18 

3.89 

3.54 

3.09 

2.55 

2.11 

3.37 

1900 

1.97 

2.71 

3.18 

3.41 

3.42 

3.29 

3.07 

2.42 

1.99 

1.55 

.97 

.72 

2.39 

1901 

.53 

1.53 

2.55 

3.11 

3.22 

3.08 

2.97 

2.78 

2.31 

1.90 

1.53 

1.09 

2.22 

1902 

.84 

1.37 

2.68 

3.20 

3.60 

3.41 

3.14 

2.77 

2.24 

1.79 

1.41 

.92 

2.28 

1903 

.89 

1.63 

2.52 

2.94 

3.17 

2.99 

2.59 

2.25 

1.72 

1.35 

1.04 

.67 

1.98 

1904 

.39 

1.09 

2.36 

3.00 

3.14 

2.80 

2.29 

1.97 

1.60 

1.28 

.98 

.56 

1.79 

1905 

.53 

1.60 

2.86 

3.63 

3.74 

3.37 

2.99 

2.93 

2.69 

2.38 

1.99 

1.66 

2.53 

1906 

1.63 

2.28 

3.20 

3.83 

3.99 

3.73 

3.40 

2.90 

2.43 

2.07 

1.53 

1.03 

2.67 

1907 

.82 

1.36 

2.79 

3.64 

4.18 

4.23 

4.04 

3.79 

3.09 

2.57 

2.06 

1.54 

2.84 

1908 

1.24 

1.58 

2.53 

3.12 

3.75 

3.73 

3.67 

2.97 

2.48 

1.96 

1.56 

1.08 

2.47 

1909 

.95 

1.56 

3.06 

3.92 

4.48 

4.48 

4.16 

3.70 

3.29 

2.84 

2.34 

1.69 

3.04 

1910 

1.40 

2.03 

3.47 

3.74 

3.76 

3.45 

3.08 

2.79 

2.22 

1.78 

1.34 

.92 

2.49 

TABLE  XIII 

EELATIVE  PRICES  OF  STOCKS  COMPARED  WITH  REL- 
ATIVE RAILWAY  DIVIDENDS  AND  NET  INCOME, 
BY  YEARS  ENDING  JUNE  30,  1891-1909,  ARITHMETIC 
MEANS 

(Based  upon  figures  of  Wesley  C.  Mitchell,  see  p.  136  supra) 


Years  ending 
June  30 

Relative  Prices  of 
Stocks 

Relative  Railway 
Dividends  per  Mile 

Relative  Net  Income  of 
Railways  per  Mile 

1890 

104 

110 

1891 

112 

108 

115 

1892 

121 

113 

121 

1893 

113 

109 

111 

1894 

83 

105 

54 

1895 

80 

87 

54 

1896 

85 

87 

83 

1897 

75 

86 

75 

1898 

92 

94 

129 

1899 

111 

107 

148 

1900 

132 

131 

200 

1901 

166 

145 

209 

1902 

233 

167 

237 

1903 

242 

173 

244 

1904 

174 

189 

222 

1905 

225 

198 

255 

1906 

262 

221 

293 

1907 

247 

245 

335 

1908 

182 

310 

293 

1909 

244 

248 

287 

INDEX 


INDEX 


Account  system,  more  highly  devel- 
oped in  Europe  than  in  America, 
32,  44;  in  organized  speculation, 
43. 

Adams,  Charles  Francis,  Jr.,  cited, 
201. 

Adventurers,  numerous  on  the  ex- 
changes, 253. 

Agriculture,  testimony  before  Com- 
mittee, House  of  Representatives, 
1st  Sess.,  52d  Congress,  cited,  124, 
175. 

Amateur  speculators,  are  called 
lambs,  47;  their  helplessness,  50- 
51;  derange  the  market,  140;  fur- 
nish a  broad  market,  147;  their 
pathological  mental  condition 
should  be  studied,  147;  of  special 
importance  in  America,  147;  their 
recklessness  should  be  bluntly 
stated,  148;  their  absurdities 
described,  150;  pay  most  of  the 
cost  of  risk-taking  on  the  ex- 
changes, 210;  their  origin,  223; 
test  of  fitness  impracticable,  242; 
German  attempt  to  eliminate 
them,  242-43;  a  practical  measure 
to  restrict  their  activity,  244-45; 
should  not  be  forced  to  avoid  all 
risks,  252. 

Annals  American  Academy  Political 
and  Social  Science,  cited,  19. 

Anti-optionists,  their  mistake,  70; 
attribute  declines  to  speculation, 
97;  their  inconsistency,  97;  their 
congressional  campaigns,  99;  can 
see  bearish  but  not  bullish  inter- 
ests, 108,  111;  usually  avoid  sta- 
tistics, 120;  their  changes  of  opin- 
ion, 122;  fail  to  understand  hedg- 
ing, 125. 

Anti-option    laws,    advocated    by 


monopolists,  217;  evasion  of,  230- 
31. 

Arbitragers,  their  function  ex- 
plained, 27;  compared  with  specu- 
lators, 28. 

Arbitration,  on  the  exchanges,  197. 

Auction,  similarity  to  exchange 
trading,  19. 

Bank  of  England,  used  by  stock- 
brokers in  early  times,  10. 

Bank  stocks,  prominent  in  early 
history  of  New  York  Stock  Ex- 
change, 11. 

Battles,  on  the  exchanges,  216. 

Bear,  W.  E.,  cited,  125. 

Bears,  their  need  of  large  reserves, 
84;  do  not  all  wish  to  cover  at  the 
same  time,  131. 

Bearish,  explained,  30. 

Bids  and  offers,  104. 

Bonds,  compared  with  other  con- 
tracts, 69;  their  value  as  a  busi- 
ness man's  reserve  and  for  hedg- 
ing, 157;  their  availability  for  this 
purpose  increased  by  recent  legis- 
lation, 158. 

Book-keeping,  saves  transfers  of 
cash,  41-42;  neutralizes  both 
demand  and  supply,  108. 

Boom,  defined,  30. 

Borrowing,  on  the  New  York  Stock 
Exchange,  36;  facilities  furthered 
by  exchange  markets,  142-43. 

Bourses,  European,  their  account 
system,  32. 

Boycott,  of  one  exchange  by  an- 
other, 222. 

Brazil,  its  valorization  plan.  81. 

Break,  defined,  30. 

Broad  Street,  New  York,  its  curb 
market,  237-38. 


280 


INDEX 


Brokers,  on  London  Stock  Ex- 
change, 25;  their  margins,  31-32; 
interested  in  advancing  prices, 
72-73,  93;  cannot  inquire  into 
affairs  of  clients,  155;  encourage 
speculation,  184;  lead  their  clients 
on  by  advertisements  and  other 
persuasion,  185;  reckless  ventures 
are  also  encouraged  outside  the 
exchanges,  186;  fined  for  con- 
tempt for  not  revealing  names 
of  clients,  191;  bogus  in  a  bucket 
shop,  236;  should  give  names  of 
parties  with  whom  deals  are 
made,  240;  should  not  re-hypothe- 
cate stocks,  241;  guilty  of  larceny 
in  certain  cases,  241;  desire  large 
margins,  245;  commissions  for 
large  and  small  lots,  247. 

Bryce,  James  A.,  cited,  11. 

Bucket-shopping,  not  speculation, 
193;  within  the  exchanges,  240. 

Bucket  shops,  sometimes  pretend  to 
be  exchanges,  235;  measures 
against  advocated  by  Hughes 
Committee,  239-40. 

Bulge,  denned,  30. 

Bull  and  bear,  explained,  29. 

Bullish,  explained,  30. 

Bulls,  would  not  attempt  to  realize 
all  at  the  same  time,  131. 

Business,  by  whom  should  it  be 
undertaken,  254. 

Business  man,  his  lack  of  scientific 
training,  101;  should  leave  to 
Wall  Street  the  direction  of  trade, 
167. 

Buyer's  option,  defined,  34. 

By-product,  resembled  by  risks 
taken  on  the  exchanges,  170. 

Call,  explained,  195. 

Cancellation  of  trades,  in  real  es- 
tate transactions,  39;  on  the 
exchanges,  39-40. 

Captains  of  industry  and  finance, 
see  conditions  in  advance  of 
others,  165. 


Carrying  charges,  explained,  118. 

Cash  transactions,  defined,  32. 

Chamberlain,  Lawrence,  cited,  6. 

Chance,  its  abolition  impossible,  4. 

Change  Alley,  stock-brokers  doing 
business  in,  10. 

Charlatans,  mislead  in  speculation 
and  elsewhere,  259. 

Chicago  Board  of  Trade,  incorpo- 
ration of,  13;  evolution,  of  form 
of  trading  in,  14;  its  regular  ses- 
sion, 20;  opening  range,  21;  its 
availability  as  a  place  for  hedging, 
24;  its  curb  market,  53-54;  its 
alleged  violation  of  the  Sherman 
Law,  263-64. 

Choppy  market,  explained,  30;  pro- 
moted by  organized  speculation, 
54-55. 

Civil  War  in  United  States,  import- 
ant event  in  history  of  exchanges, 
11;  option  system  originated  in, 
14;  widened  fluctuations  in  prices, 
58;  speculation  in  gold  at  the 
time  of,  232;  effect  of  law  prohib- 
iting such  speculation,  233;  its 
repeal,  233. 

Clearing-houses,  wide  application 
of  the  principle  in  exchanges,  45. 

Clearing-house  sheets,  recommend 
that  they  be  kept  for  six  years, 
240. 

Clews,  Henry,  cited,  48. 

Cliques,  defined,  30;  compared,  263. 

Close  of  market,  21. 

Coffee,  effect  on  prices  of  valoriza- 
tion plan,  82. 

Coffee-houses,  stock-brokers  did 
business  in,  10. 

Collateral  loans,  facilitated  by  con- 
tinuous market,  142-43. 

Commissioner  of  Corporations,  Re- 
port on  Cotton  Exchanges,  58,  91. 

Commissions,  the  anti-optionist 
view,  121 ;  by  whom  actually  paid, 
121-1 23;  smaller  when  a  large  bus- 
iness is  done,  132;  on  exchanges 
relatively  small,  169;  jealousy  of 


INDEX 


281 


exchanges,  221-222;  on  large  and 
small  lots,  247. 

Commission  houses,  belief  that  they 
are  in  league  with  market  leaders, 
129. 

Commodity  exchanges,  special  fea- 
tures in  early  history,  12;  incon- 
veniences before  their  introduc- 
tion, 13;  regulate  contracts,  18; 
abandoning  illegitimate  methods, 
260. 

Competition,  will  appear  where  pro- 
fits are  excessive,  206. 

Conant,  Charles  A.,  cited,  83,  162. 

Congressional  Record,  cited,  143. 

Cooperation,  promoted  by  ex- 
changes, 220,  221. 

Consumption,  reduced  if  prices  are 
high,  74. 

Consumption  basis,  usually  the 
bottom  on  organized  markets, 
74. 

Continent,  regulation  of  exchanges 
important,  17. 

Continuous  market,  the  result  of 
organized  speculation,  141;  of 
advantage  in  making  collateral 
loans,  142;  lacking  in  case  of  unor- 
ganized speculation,  226. 

Contracts,  demand  and  supply  of, 
68-80;  can  have  value  independ- 
ent of  commodity  called  for,  68; 
parties  who  pay  commissions  for 
trading  in,  122;  kept  more  con- 
scientiously on  exchanges  than 
elsewhere,  197. 

Corn,  its  prices  at  different  seasons 
compared,  116;  prices  compared 
with  visible  supply,  134. 

Corners,  defined,  35;  apprehension 
of,  72;  not  to  be  defended,  79; 
Leiter,  78-79,  119;  dangerous  to 
short  seller,  79;  Hutchinson,  80, 
119;  in  Erie,  89;  avoided  by  sub- 
stitution of  grades,  90;  natural, 
130;  where  most  numerous,  201; 
a  special  settlement  price;  advo- 
cated in  cases  of,  239. 


Corporations,  not  necessarily  con- 
nected with  Wall  Street,  186-87; 
subject  of  execration,  255;  possi- 
bilities, 255-56. 

Corporation  wrecker,  must  in  the 
end  seek  to  build  up  values,  188; 
short  selling  gives  special  facili- 
ties for,  188. 

Costs,  regulated  by  exchanges,  175. 

Cotton,  its  prices  at  different  sea- 
sons compared,  116;  prices  com- 
pared with  visible  supply,  134. 

Cotton  Exchanges,  Report  of  Com- 
missioner of  Corporations  on, 
cited,  58;  the  system  of  grading 
used  on,  90-92. 

Counterfeit  markets,  235. 

Covering,  defined,  35;  helps  to  turn 
a  bear  to  a  bull  market,  62; 
steadies  the  market,  127. 

"Crop-killing,"  its  systematic  use  in 
manipulation,  192. 

Cross-trading,  194. 

Curb- trading,  defined,  20;  not  sub- 
ject to  much  fluctuation,  53-54; 
the  system  prevailing  in  New 
York,  237. 

Davis,  C.  Wood,  cited,  125. 

Dealers,  on  London  Stock  Ex- 
change, 25. 

Deliveries,  on  New  York  Stock 
Exchange,  32;  on  European  stock 
exchanges,  33;  in  commodity  ex- 
changes, 33;  actual,  may  be  in- 
sisted upon,  42;  substitution  in 
making,  90;  not  the  criterion  of 
morality,  181-83. 

Demand  and  supply,  govern  prices, 
67, 102;  of  contracts,  68;  of  "  pa- 
per" wheat,  70-71;  organized 
speculation  increases  demand 
more  than  supply,  76;  of  actual 
commodities  important,  131-32. 

Differences,  payment  of,  practice 
no  different  on  exchanges  than 
elsewhere,  38;  compared  with  bal- 
ances in  a  ledger,  44;  when  paid, 


282 


INDEX 


have  their  effect,  107;  in  real 
estate  transactions,  40. 

Digestion  of  stocks  and  securities, 
defined,  36;  first  and  last  stages  of, 
87;  assisted  by  organized  specula- 
tion, 164. 

Distribution,  defined,  36. 

Dividends,  their  influence  on  the 
prices  of  stocks,  136. 

Division  of  labor,  promoted  by  ex- 
changes, 220. 

Drew,  Daniel,  his  frequent  remark, 
78. 

Earnest  money,  synonymous  with 
margin,  31. 

Education,  the  most  important  re- 
form, 252;  the  only  reform  that 
goes  to  the  root  of  the  evil,  257, 
265. 

Emery,  Henry  C.,  cited,  6,  28,  162. 

Employees  of  financial  institutions, 
brokers  should  not  accept  their 
speculative  accounts,  241. 

England,  particular  effects  of  organ- 
ized speculation  observable  in, 
88-89;  seeking  low  prices  for 
securities,  89;  Royal  Commission 
to  investigate  stock  exchange, 
234. 

Equity,  similar  to  margin,  31. 

Erie  Canal,  its  completion  a  factor 
in  commerce  and  speculation,  11. 

Erie,  corners  in  the  stock,  89. 

European  stock  exchanges,  their 
special  work,  12. 

Evasion  of  law,  methods  adopted 
by  the  Germans,  231;  methods 
which  could  be  adopted  in  this 
country,  231;  methods  always 
available,  231. 

Evolution  of  exchanges,  among  the 
ancients,  8;  in  England,  8-10;  in 
New  York,  10-11;  of  commodity 
exchanges,  12-14. 

Exchange  Hall,  business  takes  place 
in,  18;  facilities  of  exchange  con- 
verge toward,  20. 


Exchanges,  Civil  War  important  in 
their  history,  10-11;  special  ac- 
tivities of  European,  12;  trading 
in,  restricted  to  members,  16; 
memberships  valuable,  17;  form 
of  organization  in,  17;  business 
done  by  shouting  and  gesticulat- 
ing in,  19;  hours  for  business,  20; 
publicity  in,  25-27;  nervousness 
of  market  in,  52;  highest  evolution 
of  trade,  60;  fan  speculative  fever, 
64;  force  management  of  corpora- 
tions to  improve,  87;  their  action 
especially  beneficial  to  this  coun- 
try, 87;  not  as  favorable  as  re- 
gards some  other  countries,  87- 
89;  action  different  as  regards 
different  classes,  88;  commodities 
traded  in  must  be  representative, 
89;  effects  of  concentration  hi, 
146;  export  basis,  usually  the 
bottom  on  organized  markets,  74; 
exporters,  their  method  of  hedg- 
ing, 154;  regulators  of  costs  and 
profits,  175;  publicity  a  feature 
of,  177;  not  necessarily  connected 
with  mismanagement  of  corpora- 
tions, 188;  does  not  benefit  from 
corporate  mismanagement,  189; 
protagonists  of  honesty,  189; 
cannot  be  swept  away  by  any 
fiat,  204;  constitute  a  kind  of 
underwriting  organization,  208; 
their  value  to  men  of  moderate 
means,  208-09;  furnish  a  free 
field  for  competition,  213;  their 
cavalier  treatment  of  monopolists, 
216;  battles  on  the  floor,  216; 
introduce  competing  element, 
220;  promote  cooperation  and 
division  of  labor,  221 ;  their  boy- 
cotts, 222;  possibilities  for  reform 
of,  238;  endeavor  to  snuff  out  the 
smaller,  243;  their  present  repuls- 
ive aspect,  253;  promise  much  for 
the  future,  256-57;  time  needed 
for  reform,  257;  recent  specula- 
tive excitement  explained,  260. 


INDEX 


283 


Factory  system,  its  introduction  ac- 
companied by  grave  evils,  200. 

Farmers,  their  ideas  of  the  specula- 
tive markets,  66;  their  discourage- 
ment previous  to  the  Leiter  cor- 
ner, 78-79;  advocate  the  holding 
of  agricultural  products,  81;  sell 
at  high  prices  in  corners,  106; 
advised  not  to  speculate,  119; 
difficult  for  them  to  take  advan- 
tage of  corners,  119;  their  prefer- 
ence as  to  crops,  142;  customers 
brought  by  organized  specula- 
tion, 155;  method  of  hedging,  157; 
can  make  carrying  charges  on 
grain  by  storing  and  hedging, 
158-159;  their  opposition  to  city 
dealers,  160;  their  condition  fif- 
teen years  ago,  172;  complain 
that  they  do  not  get  the  bene- 
fit of  high  prices  for  food,  173; 
their  adventures  and  failures,  183. 

Fee-receiving  classes,  88. 

Financial  Review,  cited,  136. 

Flat,  term  defined,  37. 

Fluctuations,  51-52. 

Frauds,  worst  have  been  in  unlisted 
stocks,  189:  laws  prohibiting,  263. 

Fraudulent  orders,  24. 

Free  trade,  requisites  of,  60. 

Freezing  out,  stock  exchange  not 
necessary  in,  188. 

Fruits,  wide  fluctuations  in  the  price 
of,  55. 

Future  prices,  advantage  of  an  esti- 
mate by  experts,  162;  importance 
of  such  an  estimate,  163. 

Futures,  explained,  32;  similar  to 
contracts  made  outside  the  ex- 
changes, 33;  compared  to  com- 
mercial paper,  122;  perform  same 
service  as  insurance  policy,  155. 

Future  wheat,  can  be  created  in  any 
amount,  80. 

Gamblers,  should  the  community 
avail  itself  of  any  service  they 
may  perform?  212. 


Gambling,  its  similarity  to  organized 
speculation,  138;  not  necessarily 
associated  with  number  of  trades 
made,  146;  facilities  provided  by 
organized  speculation,  181;  con- 
trasted with  insurance,  181;  spirit 
of,  shown  in  outside  business, 
182-84;  on  the  exchanges,  its 
demoralizing  effects,  198-99; 
brought  to  the  attention  of  mo- 
nopolists, 217;  perverted  instinct 
of  legitimate  speculators,  223;  its 
moral  effect  worse  than  specula- 
tion, 224;  trades  made  in  gam- 
bling spirit  have  evil  effect,  234. 

Garfield,  Commissioner  of  Corpora- 
tions, cited,  173. 

Germany,  anti-bourse  law,  231-32; 
its  amendment,  232;  its  commis- 
sion to  investigate  bourses,  234; 
law  for  the  registration  of  specu- 
lators, 242-43. 

Gold,  speculation  in,  during  the 
Civil  War,  232-33;  law  prohibit- 
ing such  speculation,  233;  its  re- 
peal, 233. 

Government,  its  attempts  to  bol- 
ster prices  by  making  purchases, 
83;  report  on  crops,  192-93. 

Grading  of  commodities,  important 
in  organized  speculation,  16; 
prices  of  contract  and  non-con- 
tract grades,  75-76;  substitution 
in  making  deliveries,  90-92. 

Great  Britain,  its  stock  of  commodi- 
ties considered,  84. 

Gresham,  Sir  Thomas,  built  the 
Royal  Exchange,  8. 

Gresham's  Law,  has  its  analogue  in 
delivering  commodities,  91. 

Guaranty  companies,  refuse  to 
bond  speculators,  199. 

Hand  to  mouth  policy,  its  possibil- 
ity under  modern  conditions,  84. 

Hedging,  defined,  23;  not  a  cause  of 
price  depressions,  125-26;  results 
in  a  balancing  of  interests,  126; 


284 


INDEX 


described  by  examples,  151-59; 
bonds  used  in,  157;  its  possible 
use  in  improving  the  condition  of 
the  people,  159;  speculators  un- 
consciously hedging  each  other, 
171.  . 

Hill,  John  J.,  Jr.,  cited,  39,  236. 

"  Hold  your  wheat "  circular,  81. 

Hughes,  Committee,  Report  on 
Speculation  in  Securities  and 
Commodities,  cited,  6,  236,  237, 
238,  239, 240,  241,  245;  non-parti- 
san character,  262. 

Human  nature,  same  in  the  pit  as 
elsewhere,  46. 

Hutchinson,  B.  P.,  English  dislike  of 
him,  88;  his  corner  in  1888, 119. 

Hypothecation  of  stocks,  31. 

Income  of  railroads,  influence  on 
prices,  136. 

Inconvertible  paper  currency,  its 
effect  on  prices,  58. 

Independent,  The,  cited,  184. 

Industrial  CommissionReport,cited, 
131. 

Industrial  securities,  trade  in  them 
becoming  important,  11. 

Insiders,  supposed  to  control  quo- 
tations, 53. 

Installment  plan,  means  ultimate 
proprietorship,  246;  often  of  great 
utility,  248. 

Insurance,  a  method  of  guarding 
against  risk,  5;  against  fluctua- 
tions in  prices  of  great  value  to 
small  dealers,  169,  208-09;  con- 
trasted with  gambling,  181. 

International  trade,  ring  settle- 
ments in,  42. 

Investment  selling,  the  term  a  mis- 
nomer, 114. 

Investments,  of  savings,  248;  the 
people  turning  from  fraudulent, 
259;  of  small  operators,  261. 

Jobbers,  on  London  Stock  Ex- 
change, 25. 


Joseph,  purchases  of  corn  in  Egypt, 
8. 

Journal  of  Political  Economy,  cited, 
136. 

Journal  of  Royal  Agricultural  Soci- 
ety, cited,  125. 

Lambs,  term  defined,  47;  shearing 

their  wool,  50. 
Larceny,  brokers  should    be    held 

guilty  of,  in  certain  cases,  241. 
Large  scale  production,  its  advan- 
tages and  disadvantages,  207. 
Legislators  not  likely  to  scalp  the 

market,  191. 
Legitimate   speculation,    the    only 

acceptable  alternative  to  present 

conditions,  252. 
Leiter,  Joseph,  his  corner,  79;  his 

methods  disliked  in  England,  88; 

effect  of  corner  on  prices,  119. 
Limited  orders,  22. 
Liquidation,  defined,  35;  helps   to 

turn  bull  into  bear  market,  63;  of 

ill-judged  business  ventures,  144. 
Listed  stocks  and  securities,  sell  at 

high  prices,  77. 
Listing  of    stocks    and    securities, 

explained,  17;  tends  to  prevent 

mismanagement  in  corporations, 

189;   recommended   by   Hughes 

Committee,  238. 
Loan  crowd,  36. 
Loaning  rate,  37. 
London  Stock  Exchange,  its  early 

history,  10;  panic  of  1890  on,  12; 

classification  of  members,  25. 
Long  contract,  can  be  turned  into  a 

solid  investment,  115. 
Longs,  defined,  35;  their  interest  in 

putting  up  prices,  108. 

Manchester  Cotton  Exchange,  88. 

Manipulation,  by  matched  orders, 
24;  must  be  in  conformity  to  pre- 
judices of  traders,  72-74,  112-13; 
taking  advantage  of  the  prejudice 
of  speculators,  93;  of  a  corner. 


INDEX 


285 


105;  must  frequently  put  up 
prices,  112-13;  popular  belief  in 
regard  to,  129;  made  subject  of 
inquiry  on  stock  exchange,  145; 
may  be  welcomed  by  manage- 
ment of  corporations,  187;  tends 
to  cure  its  own  ill  effects,  188-89; 
by  lies,  191-93;  mixed  indistin- 
guishably  with  legitimate  trading, 
210-11;  facilities  for,  on  an  ex- 
change, 239;  temptation  for,  in 
amateurism,  242. 

Margin  plan,  encourages  reckless 
borrowing,  246. 

Margins,  defined,  31;  smallness  of, 
32,  51,  244;  larger  advocated, 
244-45. 

Marketing,  methods  used  for  com- 
modities sold  on  exchanges,  217; 
for  those  not  used  thereon,  218- 
20. 

Market  leaders,  encourage  bullish- 
ness in  public,  104;  their  supposed 
affiliations,  126;  able  to  predict 
conditions,  133;  conform  to  legiti- 
mate tendencies,  138;  blame  stock 
exchange  unjustly,  145. 

Markets,  method  of  broadening,  60; 
two-sided,  60-63;  organized  and 
unorganized,  61;  effect  of  two- 
sided  neutralized,  64;  continuous, 
the  result  of  organized  specula- 
tion, 141;  continuous,  of  advan- 
tage in  making  collateral  loans, 
142;  counterfeit,  235. 

Matched  orders,  defined,  24;  rule 
suggested  to  prevent,  241,  263. 

Melons,  use  of  the  word  to  lead  on 
speculators,  190. 

Memberships  on  exchanges,  often 
very  valuable,  17. 

Mercantile  exchange,  236. 

Mercantilists,  their  futile  efforts, 
128. 

Merchandising,  contrasted  in  differ- 
ent commodities,  155. 

Merrill,  John  C.  F.,  cited,  76. 

Metal  Exchange  in  New  York,  237. 


Mid-session,  its  comparative  quiet, 
21. 

Milking  the  market,  accomplished 
by  false  rumors  and  manipula- 
tions, 190-191. 

Millers,  their  profits,  118-19,  174- 
76;  their  method  of  hedging,  151- 
52;  when  hedging  do  not  necessar- 
ily insist  on  actual  deliveries,  153- 
54;  would  control  wheat  trade  if 
speculation  were  abolished,  210. 

Mitchell,  Wesley  C.,  cited,  136. 

Mixed  husbandry,  contrasted  with 
single  crop  farming,  142. 

Monopolists,  would  be  glad  to  carry 
risks  undertaken  by  exchanges, 
170;  should  not  be  allowed  to  de- 
stroy an  institution  that  protects 
the  small  business  house,  209;  if 
given  full  control,  amateurs  could 
not  run  risks,  211;  their  advocacy 
of  anti-option  laws,  217;  their 
method  of  buying,  218-20;  stock 
exchange  could  help  to  make  them 
innocuous,  248. 

New  Orleans  Cotton  Exchange,  its 
system  of  grades  and  deliveries, 
91. 

New  York  Coffee  Exchange,  its 
incorporation,  14. 

New  York  Cotton  Exchange,  its 
incorporation,  14;  its  system  of 
grades  and  deliveries,  91;  its  by- 
laws amended,  92. 

New  York  Independent,  cited,  184-85. 

New  York  Produce  Exchange,  origin 
traced  to  Dutch  occupation,  14. 

New  York  Stock  Exchange,  its  or- 
ganization, 10;  not  incorporated, 
17;  listing  of  stocks  in,  17;  regu- 
lates engraving  and  issuing  stock 
certificates,  18;  posts  around 
which  trading  takes  place,  19; 
its  regular  session,  20;  opening 
ranges,  21;  the  intentions  of  its 
founders,  24;  deliveries  upon,  32; 
borrowing  stock,  36;  compared 


286 


INDEX 


with  European  bourses,  182;  its 
constitution,  237;  its  rules  as 
regards  employees,  241;  as  to  the 
unit  of  trading,  241 ;  recent  specu- 
lative excitement  upon,  260-61; 
incorporation  advocated  for,  263. 
Non-speculative  grades,  their  spe- 
cial advantages,  74. 

Odd  lots,  dealing  in,  should  be  en- 
couraged, 247. 

Offers  to  sell,  no  more  easily  made 
than  offers  to  buy,  104. 

Opening  of  the  market,  21. 

Opening  range,  21. 

Option,  defined,  33;  as  used  in  real 
estate  transactions,  195. 

Orders,  facilities  for  execution  of, 
21;  quickness  in  executing,  22;  at 
the  market,  22, 52;  resting  orders, 

'    22;  stop  loss,  22-23;  hedging,  23; 

1  result  of,  24;  fraudulent,  24; 
matched,  24. 

Organized  speculation,  definition,  8; 
evolution,  8-14;  commodities 
suitable  for,  15;  raison  d'etre  of 
fluctuations  in  prices,  16;  culmi- 
nation of  inventions  for  gathering 
commercial  news,  27;  its  lan- 
guage, 29;  modern  accounting 
methods  in,  44;  great  number  of 
transactions  in,  46;  check  on 
movement  of  prices,  61-62;  its 
effect  in  creating  demand,  76; 
causes  price  advances,  81 ;  does  not 
affect  all  nations  in  the  same  way, 
88-89;  adds  both  to  demand  and 
supply,  103;  furnishes  a  demand 
at  marketing  time,  115-17;  its 
effect  on  the  profits  of  millers, 
118;  exists  to  make  prices,  126; 
similarity  to  gambling,  138;  as- 
sists in  the  operation  of  our  reserve 
system,  44;  specializes  makers  of 
world  prices  and  of  local  prices, 
160-61;  its  good  effects  best  seen 
after  it  has  done  its  work,  164; 
husbands  resources,  176-77;  its 


publicity,  177;  affords  facilities 
for  gambling,  180-81;  many 
abuses  can  be  traced  to  its  new- 
ness, 200-01;  reforms  not  only 
itself  but  other  kinds  of  commerce, 
202;  its  faults  involve  moral 
evils,  203;  kind  of  reforms 
needed,  204;  underlying  principle, 
204;  at  the  worst  it  has  its  uses, 
224;  number  of  those  who  use  it 
rightly  must  be  increased,  233; 
one  effect  of  restrictive  measures, 
243;  cannot  be  developed  by 
rules  and  prohibitions,  249;  its 
possibilities  in  utilizing  a  know- 
ledge of  economics,  250;  its  legiti- 
mate use  should  be  encouraged, 
252;  its  grave  evils,  253;  is  tend- 
ing in  the  direction  of  the  best 
ideals,  257;  progress  remarkable, 
258;  how  it  is  showing  its  value, 
261-62;  its  place  in  the  commer- 
cial system,  262. 

Outside  business,  compared  with 
exchange  business,  198. 

Outsiders,  their  belief  that  organized 
speculation  depresses  prices,  66. 

Outside  markets,  commodities  han- 
dled many  times,  146. 

Over-extension  in  business,  its  dan- 
gers, 227-28. 

Packers,  their  profits,  173;  buy  out- 
side exchanges  and  sell  in  ex- 
change markets,  174. 

Panics,  defined,  30;  danger  of,  44; 
buying  in,  48;  relief  given  by  stock 
market,  144;  stock  exchange 
accused  of  producing,  144;  stock 
exchange  guards  against,  145; 
not  always  founded  on  business 
conditions,  167;  progress  shown 
in  1907. 

Paper  representatives  for  commod- 
ities, 60. 

Paris  Bourse,  constitution  of  Par- 
quet, 17. 

Patten,  James  A.,  mobbed  in  Eng- 


INDEX 


287 


land,  88;  his  controversy  with 
Secretary  Wilson,  98. 

Periodical  press,  its  importance  in 
distributing  quotations  and  news, 
26;  its  educative  influence,  258. 

Pillsbury,  Charles  A.,  his  idea  of  the 
effect  of  organized  speculation 
on  seasonal  prices,  118;  cited, 
174-75. 

Pit,  description  of,  18;  human  na- 
ture in,  46. 

Point,  explained,  30. 

Policy  of  insurance  and  future  con- 
tracts perform  the  same  service, 
155. 

Pools,  explained,  30. 

Prejudice  against  speculation,  3. 

Premiums  on  stocks,  37. 

Prices,  range  of,  55-59;  danger  in 
forcing  below  natural  values,  72; 
three  important  tendencies  illus- 
trated, 94;  common  assumption 
that  only  one  factor  can  affect,  96; 
determined  by  demand  and  sup- 
ply, 102;  interest  of  manipulators 
in  advances,  113;  in  corners,  119; 
fluctuations  not  always  legitimate, 
126;  unnatural  methods  outside 
the  exchanges,  126;  determined 
by  supply  and  demand,  132;  move 
sooner  than  visible  supply,  133; 
rise  and  fall  inversely  with  visible 
supply,  132,  133;  of  stocks  vary 
with  legitimate  influences,  135;  a 
concomitant  of  civilization,  162; 
direct  trade  and  industry,  162- 
63;  fixed  upon  the  exchanges, 
express  the  true  value  of  securi- 
ties, 164;  indicate  the  course  of 
trade,*  166;  effect  of  their  rise, 
260. 

Privileges,  explained,  194-95;  not  a 
good  hedge,  196;  do  more  good 
than  injury,  196-97;  their  elimi- 
nation as  a  means  of  discouraging 
small  traders,  243. 

Production,  increased  if  prices  are 
high,  74. 


Professional  speculators,  described, 
47-49;  have  greater  financial 
strength  than  outsiders,  114. 

Profits,  regulated  by  exchanges,  175. 

Promises  to  deliver  commodities,  60. 

Promoters,  affiliated  with  stock  ex- 
changes, 214;  [anxious  to  have 
their  stocks  listed,  77-78;  their 
views  contrasted  with  those  of 
farmers,  78. 

Public  are  always  bulls,  104. 

Publicity,  on  the  exchanges,  26, 
177-78,  238;  favored  by  Hughes 
Committee,  239. 

Pujo  Committee,  investigating  the 
"Money  Trust,"  testimony  cited, 
222;  result  of  report  of,  265. 

Puts,  explained,  195. 

Pyramiding,  described,  245. 

Quotations,  how  marked  down,  24; 
method  of  sending  out,  25;  their 
legitimacy,  128-31 ;  fictitious,  236. 

Railroads,  when  first  built  were  poor 
investments,  86. 

Real  estate,  cancellation  of  trades 
in,  39;  rings  in,  41;  wide  fluctua- 
tions in  price  of,  55, 109;  suddenly 
becomes  unsalable,  141;  methods 
used  in  trading  in,  are  condemned 
if  used  on  the  exchanges,  195; 
misery  caused  by  speculation  in, 
226-27. 

Re-hypothecation  of  securities 
against  the  wish  of  owners,  241. 

Reserves,  must  be  large  if  there  be 
short  selling,  81;  if  large,  a  bear 
argument,  83;  rendered  necessary 
by  short  selling,  84;  cause  con- 
sumption of  commodities,  85; 
tend  to  grow  larger  each  year,  85; 
loss  of  weight  in,  85;  large,  at- 
tracted by  organized  speculation, 
177. 

Resting  orders,  explained,  22-23. 

Ring  settlements,  examples  of,  40- 
42. 


288 


INDEX 


Ringing  out,  accomplishes  the  settle- 
ment of  future  contracts,  131. 

Risks,  found  every  where,  4;  guarding 
against,  5;  segregation  of,  6;  costs 
of,  169-71;  should  they  be  borne 
by  monopolists  or  speculators? 
210-13;  in  outside  business,  227- 
30. 

Room  traders,  25. 

Rothschild,  Nathan  Mayer,  his 
speculations,  10. 

Royal  Commission  to  investigate 
stock  exchanges,  234. 

Royal  Exchange,  a  new  type  at 
time  of  opening,  8;  separation  of 
interests  represented  upon,  9. 

Rumors,  effect  of,  53;  scalping  the 
market  by  aid  of,  189-90. 

Salaried  classes,  88. 

Sales,  fallacy  arising  in  use  of  the 
word,  100-01 ;  use  of  word  as  syn- 
onym with  transaction,  102. 

Sample  transactions,  facilities  for, 
18-19. 

Sao  Paulo,  Brazil,  its  valorization 
plan,  81. 

Scalpers,  defined,  48-49;  profession- 
al, 49;  equalize  the  market,  49; 
can  use  privileges,  196. 

Season  for  marketing,  natural  that 
prices  be  low,  115. 

Sellers,  defined,  22. 

Sellers'  option,  defined,  33-34. 

Settlements,  no  philanthropy  shown 
in  making,  105 ;  in  case  of  a  corner, 
106. 

Settling  price,  its  conveniences,  42. 

Sherman  Law,  alleged  violation  of, 
by  Chicago  Board  of  Trade,  263- 
64;  probable  revision  of,  265. 

Short  contract,  temporary  specula- 
tion, 114. 

Short  selling,  defined,  34;  market  in 
which  it  is  absent,  60-61;  brings 
runaway  market  to  a  halt,  61; 
extensive,  implies  large  reserves, 
81;  its  possible  use  by  a  member 


of  a  pool,  82;  renders  large  sup- 
plies necessary,  83-85;  too  much 
attention  given  to  it,  100;  no 
greater  effect  than  long  buying, 
100;  its  dangers,  105-06;  steady- 
ing effect  when  shorts  are  covered, 
127;  furnishes  special  tempta- 
tions to  corporation  wrecker,  188; 
necessary  to  a  free  market,  205; 
effect  of  abolishing,  109,  205; 
must  be  retained.  233;  rank  and 
file  of  speculators  learning  its  use, 
260;  its  abolition  proposed,  263. 
Shorts,  defined,  35;  purchase  in  a 
panic,  62-63;  their  apprehensive- 
ness,  93;  contrasted  with  longs, 
78;  causing  advances  in  price, 
84-85;  their  interest  in  depressing 
prices,  108. 
Single  crop  farming,  contrasted 

with  mixed  husbandry,  142. 
Slump,  explained,  30. 
Smith,  Charles  W.,  cited,  103. 
Socialism,  looks  with  horror  upon 

gainful  trade.  146. 
Specialists,  should  not  be  allowed 

to  deal  for  own  account,  240. 
Specialization  of  different  kinds  of 

price  makers,  163. 
Speculation,  definition,  6;  in  com- 
modities, a  later  development 
than  speculation  insecurities,  201. 
Speculative  business,  the  gambling 
spirit  called  forth  by,  182-84; 
compared  with  organized  specu- 
lation, 228-29;  more  dangerous 
than  organized  speculation,  230. 
Speculative  directors,  temptations 
to  speculate,  187;  forced  into  the 
market,  187;  spreading  false 
rumors,  189;  manipulate  the  mar- 
ket by  false  rumors  and  myster- 
ies, 190-91. 

Speculators,  bear  certain  risks,  5; 
their  function  compared  with  that 
of  insurers,  6;  distribute  demand 
and  supply  over  different  periods 
of  time,  6;  their  business  not 


INDEX 


289 


essentially  different  from  that 
of  others,  15;  classified,  46; 
amateur,  47;  professional,  47-49; 
who  scalp  the  market,  48;  who 
depend  upon  fraud,  49 ;  greedy  and 
impatient,  52;  excitability  and 
recklessness  of,  64;  their  limita- 
tions, 66;  their  temper,  71-72; 
have  not  sufficient  money  to  mar- 
gin short  wheat  to  the  extent  sup- 
posed, 79;  their  services  in  carry- 
ing large  supplies  of  commodities, 
84;  professional  are  frequently 
bears,  112;  but  are  sometimes 
bulls,  113;  how  they  settle  their 
contracts,  131  ;their  qualifications, 
149;  indicate  proper  value  before 
investors  are  willing  to  act,  163; 
successful,  initiate  market  move- 
ments, 165-66;  unskilled,  run 
risks  from  love  of  gambling  haz- 
ards, 171 ;  legitimate  and  counter- 
feit compared,  180;  led  on  by 
advertisements  of  brokers,  185; 
more  influenced  by  mysteries 
than  by  facts  and  figures,  190; 
not  willing  to  admit  their  own 
folly,  198;  their  type  of  mind,  214; 
their  cause  of  failure,  223;  test  of 
fitness  impracticable,  242;  at- 
tempted registration  of,  242-43; 
poor,  should  have  a  chance  to 
grow  up  in  business,  244;  chance 
of  success  increased  by  large  mar- 
gins, 245;  learning  to  sell  short, 
260. 

Spotty  or  spotted  market,  30. 

Spot  transactions,  32. 

Statements  of  financial  condition  of 
corporations,  239. 

Stock  book,  43. 

Stocks  and  securities,  when  listed 
sell  at  high  prices,  77;  their 
sale  to  speculators,  87;  admitted 
that  speculation  puts  their  prices 
up,  98;  prices  vary  with  legiti- 
mate conditions,  136;  made  liquid 
by  organized  speculation,  144; 


brokers  should  not  lend  or  re- 
hypothecate, 240-41;  broker 
guilty  of  larceny  if  he  sells  stocks 
belonging  to  others  without  their 
consent,  241;  size  of  holdings 
large,  247. 

Stop  orders,  explained,  22-23;  not  a 
feature  in  outside  business,  23; 
furnish  an  incalculable  element, 
52. 

Strong  market,  30. 

Substitution,  in  outside  business, 
37-38;  upon  an  exchange,  38. 

Sulzer,  Gov.,  his  recommendations, 
265. 

Supply  and  demand,  the  determin- 
ing element,  130-32. 

Swindlers,  selling  stocks  to  the 
people,  248;  the  people  turning 
from  them,  259. 

Syndicates,  defined,  30;  possibility 
of  one  member  selling  out,  82. 

Tape,  explained,  26. 

Tape  game,  a  form  of  bucket-shop- 
ping, 236. 

Technical  position  of  market,  69. 

Telegraph  companies,  should  pub- 
lish names  of  subscribers  to  ticker 
service,  240. 

Ticker,  explained,  26;  news,  51; 
should  it  occupy  a  place  in  cap- 
itol  buildings?  191;  regulations 
suggested  by  Hughes  Committee, 
240. 

Tip,  defined,  30. 

Tobacco,  method  by  which  it  is 
bought,  218-19. 

Trade,  should  not  be  restricted,  126. 

Traders,  discouraging  those  with 
small  capital,  243-44. 

Trading,  great  amount  of  it  intro- 
duced by  organized  speculation, 
108-09;  not  necessarily  illegiti- 
mate, 146. 

Trusts,  their  wide  prevalence,  129; 
driven  to  bankruptcy  by  small 
business  houses,  206;  natural 


290 


INDEX 


tendencies  will  in  time  settle 
abuses  of,  207;  should  have  no 
adventitious  aid,  208;  formed  by 
those  who  wish  to  escape  risks, 
214;  sometimes  overshadow  ex- 
changes which  thwart  them,  214; 
the  transformation  going  on,  261. 

United  States  Senate,  Sen.  Doc.  No. 

372,  2d  Sess.  59th  Cong.,  cited, 

218-19. 
United  States  Steel   Corporation, 

sale  of  its  shares  as  a  hedge,  156- 

57. 

Unloading,  defined,  35. 
Unorganized  speculation,   extreme 

price  movements,  61 ;  points  in  its 

favor,  225-26;  objections  to  it, 

226-27. 
Unskilled,  their  participation  not 

desirable,  151. 

Valorization,  history  of,  81-82; 
attacked  by  United  States  Gov- 
ernment, 82. 

Visible  supply,  indicates  price  vari- 
ations, 132;  of  wheat,  133,  270; 
of  com,  134,  271;  of  cotton,  135, 
272. 

Wage-earners,  their  position  when 

prices  are  high,  88. 
Waiting  orders,  defined,  22;  their 

effect  upon  the  market,  53. 
Wall  Street,  has  developed  the  pro- 


ducing power  of  the  country,  11; 
building  railways  its  most  impor- 
tant work,  11;  created  a  demand 
for  railroad  stocks,  85;  more 
recently  has  developed  industrial 
securities,  11;  as  a  place  of  tem- 
porary investment,  144;  predicts 
values  of  groups  of  securities, 
164-65;  predicts  business  move- 
ments, 166;  makes  some  false 
prophecies,  167;  makes  correct 
prophecies  in  spite  of  wishes  of 
its  leaders,  168;  not  necessarily 
connected  with  corporations,  186- 
87. 

Warehousemen,  their  method  of 
hedging,  154. 

Warehouse  receipts,  used  in  making 
deliveries,  16;  may  not  be  issued 
in  excess  of  the  amount  in  store, 
80. 

Wash  sales,  defined,  24;  used  to 
induce  speculation,  86. 

Weak  market,  defined,  30. 

Wheat,  its  prices  at  different  sea- 
sons compared,  116;  prices  com- 
pared with  visible  supply,  132; 
prices  move  inversely  with  visible 
supply,  133. 

Wilson,  Secretary,  his  controversy 
with  James  A.  Patten,  98. 

World  value  and  local  value  differ- 
entiated, 160-61. 

Yale  Review,  cited,  148. 


CAMBRIDGE  .  MASSACHUSETTS 
U  .  S   .  A 


21-100 


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